PAGENO="0001"
`f y j C
ENERGY AND ENVIRONMENTAL OBJECTIVES
`~`~ ~ r~ ~ ~
HEARINGS
BEFORE THE
SUBCOMMITTEE ON ENVIRONMENT
OF THE
COMMITTEE ON COMMERCE
UNITED STATES SENATE
NINETY-THIRD CONGRESS
SECOND SESSION
ON
ENERGY AND ENVIRONMENTAL OBJECTIVES
MAY 6 AND JULY 18, 1974
Part 2
Serial No. 93.-68
Printed for the use of the Committee on Commerce
- JV~4'~ ~
~!7
~ ~
/7) /
L 73/2~~-~ U.S. GOVERNMENT PRINTING OFFICE
42-367 WASHINGTON : 1974
PAGENO="0002"
COMMITTEE ON COMMERCE
WARREN G. MAGNUSON, Washington, Chairman
JOHN 0. PASTORE, Rhode Island NORRIS COTTON, New Hampshire
VANCE HARTKE, Indiana JAMES B. PEARSON, Kansas
PHILIP A. HART, Michigan ROBERT P. GRIFFIN, Michigan
HOWARD W. CANNON, Nevada HOWARD H. BAKER, JR., Tennessee
RUSSELL B. LONG, Louisiana MARLOW W. COOK, Kentucky
FRANK E. MOSS, Utah TED STEVENS, Alaska
ERNEST F. HOLLINGS, South Carolina J. GLENN BEALL, Ja., Maryland
DANIEL K. INOUYE, Hawaii
JOHN V. TUNNEY, California
ADLAI E. STEVENSON III, Illinois
FREDERICK J. LORDAN, Staff Director
MICHAEL PERTSCHUK, Chief Counsel
S. LYNN SUICLIFFE, General Counsel
LEONARD BICKwIT, Jr., Staff Counsel
ARTHUR PANKOPF, Jr., Minority Counsel and Staff Director
THOMAS L. ADAMS, Jr., Minority Staff Counsel
SUBCOMMITTEE ON ENVIRONMENT
PHILIP A. HART, Michigan, Chairman
FRANK E. MOSS, Utah, Vice Chairman
JOHN 0. PASTORE, Rhode Island MARLOW W. COOK, Kentucky
RUSSELL B. LONG, Louisiana HOWARD H. BAKER, Ja., Tennessee
JOHN V. TUNNEY, California JAMES B. PEARSON, Kansas
ADLAI E. STEVENSON III, Illinois
(II)
PAGENO="0003"
CONTENTS
CHRONOLOGICAL LIST OF WITNESSES
MAY 6, 1974
Page
Fant, Lester G., III, attorney, Cohen & TJretz, Washington, D.C 79
Shulman, Harvey J., attorney, Media Access Project, Washington, D.C.;
accompanied by Robert and Carole Kunstadt 39
Exhibit A 68
Exhibit B 68
Exhibit C 73
Exhibit D 74
JULY 18, 1974
Black, Samuel, attorney, Tax Analysts & Advocates 136
Letter of August 27, 1974 141
Dowd, Joseph, vice president and general counsel, American Electric Power
Service Corp.; accompanied by A. W. D. Gronningsater, tax counseL~_ 108
Exhibit A 122
Loveland, B. F., vice president, marketing-commercial sales, Shell Oil Co 124
Letter of August 19, 1974 129
Miscellaneous articles 131
McKenzie, Harold C., Jr., senior vice president, Georgia Power Co.; accom-
panied by Frances Pledger, advertising manager; and N. Underwood,
general counsel 147
Prepared statement 151
Exhibit A 158
Exhibit B 158
Exhibit C 199
Schmertz, Herb, vice president, Public Affairs, Mobil Oil Co., accompanied
by David A. Lindsay
ADDITIONAL ARTICLES, LETTERS, AND STATEMENTS
Allport, Peter W., president, Association of National Advertisers, Inc.,
letter of July 15, 1974 195
Crichton, John, President, American Association of Advertising Agencies,
Inc., letter of July 16, 1974 196
Schmidt, Herman J., Mobil Oil Corp., letter of February 22, 1974 159
Sirkin, Natalie, letter of May 9, 1974 195
Smith, Stanford, president, American Newspaper Publishers Association,
letter of July 19, 1974 198
(in)
PAGENO="0004"
PAGENO="0005"
ENERGY AND ENVIRONMENTAL OBJECTIVES
MONDAY, MAY 6, 1974
U.S. SENATE,
COMMIr2EE ON COMMERCE,
SUBCOMMITTEE ON THE ENVIRONMENT,
Washington, D.C.
The subcommittee met at 9 :35 a.rn. in room 5110 of the Dirksen
Senate Office Building, Hon. Philip A. Hart (chairman of the sub-
committee) presiding.
Senator HART. The committee will be in o~der.
I think it is generally understood the subcomi'nittee earlier this
year began a review or an effort better to understand the relationship
between the energy crisis and those efforts which are underway to
protect the environment. And today, a continuation of that general
study brings us to the question of advertising and its relationship
and effect.
To help us better understand that, we welcome as our first witness
Mr. Harvey Shulman of the Media Access Project of Washington.
Mr. Shulman?
STATEMENT OF HARVEY J. SHULMAN, ATTORNEY, MEDIA ACCESS
PROJECT, WASHINGTON, D.C.; ACCOMPANIED BY ROBERT AND
CAROLE KUNSTADT
Mr. SHULMAN. Thank you, Senator Hart.
I am assisted today by our student intern, Robert Kunstadt. Carole
Kunstadt will handle some of the displays we have for the
subcommittee.
I am an attorney with Media Access Project, a Washington, D.C.,
public interest law firm specializing in representation of citizen groups
and individuals who seek access to the electronic and print media in
order to present their views on important controversial issues includ-
ing the environment, the energy crisis, equal employment and various
consumer-related matters.
For some months now Media Access Project has been conducting an
in-depth study of corporate advertising which addresses environmental
and energy issues.
For example, in January 1974, we filed a petition with ti~e FTC on
behalf of six Members of Congress requesting that the FTC require
substantiation for many of the claims made in corporate image adver-
tisements which favorably portray the advertiser's environmental and
energy performance and record.
Staff member assigned to these hearings: Leonard Bickwit, Jr.
(39)
PAGENO="0006"
40
We were concerned that the FTC was permitting businesses to win
increased profits by making false or misleading image claims.
In March 1974 we served as counsel to. and joined with, 16 Members
of Congress and several citizen groups in requesting this countrys
6,000 radio and television stations to provide free air time for spot
advertisements which would present consumer-oriented solutions to
the energy crisis [in contrast with the hundreds of oil and utility com-
pany ads now being aired].
We were motivated by fears that on important public issues the
broadcast industry was permitting itself unwittingly to be used as a
propaganda mouthpiece for the business community.
I am here today at your kind invitation to talk about another aspect
of the massive propaganda campaign being conducted by a large
number of America's giant businesses.
In short, our investigation and research has revealed that many
oil, utility and other energy-related industries have engaged in mas-
sive violations of both the tax laws of the United States and account-
ing principles established by the FPC.
While the exact amount of money involved cannot be stated at this
time, it is clear that we are in the midst of a multimillion dollar scan-
dal involving the failure of the Internal Revenue Service and the FPC
to enforce laws regarding the proper tax and accounting treatments
of enormous sums of money spent for corporate advertising.
Every citizen, as a taxpayer and as a ratepayer, is suffering finan-
cially and politically from this scandal.
As part of our investigation of corporate advertising, media access
project began to notice the trend away from soft image advertising
toward harder hitting ads which discussed matters of legislative
concern.
We were particularly interested in determining whether businesses
were improperly treating the costs associated with certain political
ads as deductible business expenses under section 162 of the Internal
Revenue Code; and whether utilities were treating the costs a ssociated
with such ads as operating expenses to be passed along in the form of
iiicreased rates to consumers.
During our investigation we were contacted by staff members from
this subcommittee who explained that in preparation fr proposed
hearings on "Advertising and the Environmental Movement," they
would appreciate any material we had gathered on that subject.
V\Te turned over an enormous amount of material to this subcommit-
tee, including most of the ads which I will discuss today.
Sometime later, when we learned that Senator Hart had written
to many corporate advertisers to obtaiii their views on the tax treat-
ment of certain of these ads, we reqnested to see the responses.
The staff, as I understand it, made these respoiises available to our-
selves and others for analysis to the extent that the companies did not
reouest nondisclosure.
We and others were then invited to present our evaluation in this
forum.
I would like to lodge with the subcommittee-and I have already
done so as part of my written statement-exhibit A, a copy of the
letter which Senator Hart sent to 35 selected energy-related companies
PAGENO="0007"
41
that conducted advertising campaigns in major newspapers and on the
maj or television networks.
Among the questions asked were (a) how much the company spent
on total advertising in 1973 and (b) how that amount was allocated
among product/service advertising, goodwill/institutional advertising
and political advertising; the latter being defined as that advertising
considered to be, for tax purposes, nondeductible as a business expense
under IRS Reg. 1.162-20(c) (4).
Additionally, each company was sent one or more of its advertise-
ments and was asked to classify the ad or ads into one of these three
categories.
I would like to submit to this subcommittee copies of those ads,
marked as exhibits 1 through 99, as well as a list attached as "exhibit
B-Description of Ads Attached to Senator 1-lart's Letter of January
28, 1974 to Various Companies."
The amount of aclveitising by the selected energy-related industries
is staggering. General Motors, for example. spent $243 million in 1973.
Amounts spent by oil companies varied from $8.9 million expended by
Phillips Petroleum to $27.1 million spent by Texaco.
The total of advertising expenditures for the oil companies to which
Senator Hart wrote-Atlantic Richfield, Exxon, Gulf, Mobil, Phillips,
Shell, Texaco, and the American Petroleum Institute-is $126.0
million.
Since the figures provided by Gulf were held by the subcommittee
as confidential, I have estimated Gulf's expenditure at $15 million,
somewhat less than the amount spent by the other companies.
Of this $126 million the companies contend that 45.5 percent should
be classified as product/service advertising, 47.1 percent as institu-
tional/goodwill advertising, 6.4 percent as miscellaneous, and 0.7 per-
cent as nondeductible political advertising.
In absolute figures, the dollar amounts assigned by the oil companies
to each category, again estimating for Gulf, are $58.3 million for prod-
uct/service advertising, $59.8 million for goodwill-institutional ad-
vertising, $7.1 million for miscellaneous advertising, and $.8 million
for nondeductible political advertising.
It is most significant, and I will further this throughout my testi-
mony, that only Mobil Oil Co. considers any of its 1973 advertising to
be in the nondeductible political category.
Of course, it must be recognized that these dollar totals ($126 million
for the industry companies to which Senator Hart wrote) do not in-
clude other major oil companies such as Standard of Indiana, Sun Oil,
Standard of California, Getty, Ashland, Hess, Cities Service, and
others.
It may be that the oil industry, when considered as a whole, spends
a quarter of a billion dollars on advertising in 1973.
The total amount of money spent by utility companies on adver-
tising is more difficult to compute. In 1970 the Nation's utilities spent
$88.7 million on promotional and institutional advertising. Not in-
cluded in that figure are other sales expenses which totaled over $300
million.
Neither of these amounts should be expected to have decreased in
1973-in fact, advertising appears to have increased as more utilities
PAGENO="0008"
42
are taking to the airwaves, and the pages of our newspapers and
magazines.
Moreover, there has been an expanded campaign by utility trade
groups who do not report their figures to the Federal Power Com-
mission, such as the American Gas Association.
1973 advertising totals for the selected 15 utilities and utility-related
companies which responded to Senator Hart's letter are $6.0 million
on product/service advertising, and $0.7 million on miscellaneous
advertising, for a total of $17.6 million.
With the exception of Florida Power & Light Co., none of these
companies categorized any of their ads as nondeductible or political.
A more complete analysis of 1973 utility expenditures can be found
by referring to the annual accounting reports filed each year with the
FPC. It is an enormous task to aggregate and categorize the forms of
the over 200 reporting utilities.
Yet to give some idea of the scope of the current utility ad cam-
paigns, we have examined the forms for the seven members of the
not especially large American Electric Power system.
These companies spent $3.6 million on product/service and insti-
tutional/good will advertising; stated that only $18,000 was spent
on political activities: and they reported no political ads, although
many political ads were sponsored by American Electric Power in
1973.
It would not be too far afield to suggest that utility advertising
expenditures for 1973 exceed $100 million and may, according to esti-
mates of an FTC Commissioner, run as high as a third of a billion
dollars.
There will always be problems in attempting to define the various
types of advertising that exist in this Madison Avenue era so that
every advertisement can be neatly categorized as being of one type
or another.
I would like to describe product/service advertising.
We would probably all agree that. product/service advertising con-
sists of direct claims about the product or service sold by the adver-
tiser which are intended to sell that product or service.
Product/service advertising which is an ordinary and necessary
business expense may be treated as tax deductible under section 162
of the Internal Revenue Code.
Similar "advertising designed to promote or retain the use of utility
service" and which does not specifically refer to any appliances ~old
by a utility advertiser, must be listed as an operating expense under
account No. ~13 of the FPC's uniform system of accounts.
This accounting system, under which over 90 percent of the Nation's
utilities must report their expenses to the FPC, basically classifies
expenses as either operating or nonoperating.
The FPC usually considers operating expenses as legitimate utility
costs to be passed along to purchasers of electricity or natural gas in
ratemaking proceedings over which the FPC has jurisdiction; and
even where rates are set by a State utility commission, rather than the
FPC, the FPC's recognition of an item as an operating expense often
serves to similarly Jegitimize the absorption of the costs by the con-
sumer-ratepayer affected by State utility commission ratemaking
proceedings.
PAGENO="0009"
43
Nonoperating expenses may not usually be passed along to pur-
chasers in FPC proceedings, and a like result is often achieved, though
not required, in State proceedings.
Next I discuss institutional/goodwill and political advertising.
There is a greater disagreement about the deffnition of institutional/
goodwill advertising and its treatment for tax and FPC accounting
purposes.
The Publishers Information Bureau and Leading National Adver-
tisers, Inc., refer to such advertising as "image advertising."
They define "image advertising" as including advertising which is
"devoted primarily to selling the corporate personality"; its first ob-
jective goes beyond the direct sale of a single product or service.
A broader definition was offered in conjunction with a major indus-
trial marketing survey in 1967. It defines "image advertising" as "ad-
vertising in media, the prime purpose of which is other than a direct
influence on the purchase of a product or products, and the motive
behind which is the projection of the corporate image-even though
such advertising may be `product' in nature."
To a large extent1 all nonproduct/service advertising may be con-
sidered as "image advertising" in that it obviously seeks to portray
the corporate advertiser's practices and policies in a favorable light.
~1Tet for purposes of the internal revenue laws and the FPC's ac-
counting procedures, institutional/goodwill advertising is more
strictly defined.
Under Internal Revenue regulations, for institutional/goodwill ad-
vertising to be considered as a deductible business expense, not only
must it be "ordinary and necessary," but it must also be intended to
"keep the taxpayer's name before the public" and be "related to the
patronage the taxpayer might reasonably expect in the future."
The Internal Revenue regulations also draw a distinction between
two different types of institutional advertisements. I think this is
the crux of what we will be getting into in the testimony. The Service
says:
A deduction will ordinarily be allowed for the cost of advertising which keeps
the taxpayer's name before the public in connection with encouraging contribu-
tions to such organizations as the Red Cross, the purchase of ITS. Savings Bonds,
or participating in similar causes. In like fashion, expenditures for advertising
which presents views on economic, financial, social, or other subjects of a gen-
eral nature, but which does not involve any of the activities specified in para-
graphs (b) or (c) of this section for which a deduction is not allowable, are
deductible if they otherwise meet the requirements of the regulations under sec-
tion 162.
The other ty'pe of institutional advertisement which Senator Hart
has chosen to call "political" is treated in paragraphs (b) and (c), as
follows:
Expenditures for lobbying purposes, for the promotion or defeat of legisla-
tion for political campaigns (including the support or opposition to any
candidate for public office), or for the carrying on of propaganda (including ad-
vertising) relating to any of the foregoing purposes are not deductible from
gross income.
As an example, the Service gives:
The cost of advertising to promote or defeat legislation or to influence the
public with respect to the desirability or undesirability of proposed legislation is
not deductible as a business expense, even though the legislation may directly
affect the taxpayer's business.
PAGENO="0010"
44
Expenditures for the promotion or defeat of legislation, in the words
of theiRS:
Include hut shall not be limited to expenditures for the purpose of attempting
to: (1) Influence members of a legislative body directly, or indirectly by urging
or encouraging the public to contact such members for the purpose of proposing,
supporting, or opposing legislation; or (2) influence the public to approve or
reject a measure in a referendum, initiative vote on a constitutional amendment,
or similar procedure.
Certain "political expenses" which are "in direct connection with
appearances before, submission of statements to, or sending coinmuni-
cations to. the committes. or individual members" of legislatures "with
respect to legislation of direct interest to the taxpayer" were specifi-
cally made deductible by Congress `in 1962 in section 162(e) of the
Internal Revenue Code; but Congress expressly stated that the 1962
law should not be construed as allowing the deduction of any amount
paid "in connection with any attempt to influence the general public
or segments thereof, with respect to legislative matters, elections, or
referendums."
The 1962 law was intended only to eradicate the anomaly by which
taxpayers could deduct for direct communications with the Execu-
tive, administrative agencies, and courts, but was prohibited from
similarly deducting for direct communications with legislatures.
Again, it was not intended to reverse longstanding Internal Reve-
nue policies, continuously applied since 1918 when the Service's rule
stated `that:
Sums of money expended for lobbying purposes, the promotion or defeat of
legislation, the exploitation of propaganda, including advertising other than
trade advertising, and contributions for campaign expenses, are not deductible
from gross income.
The 1918 regulation underwent various semantic changes. but its
substantive provisions remained the same.
In short, the 1962 law was not a. license to corporate advertisers to
propagandize t.o `the public on matters of legislative concern, or any
other controversial matters, through subsidization from the public
coffers.
The FPC also treats political advertising in a way distinct from
institutional/goodwill aclvcrti sing. For FPC accounting purposes,
institutional/goodwill advertising is to be listed as an operating
expense in account No. 930, miscellaneous general expenses.
Although the FPC has never fully defined what constitutes such
advertising, it has recognized its purpose is to foster `and maintain
public goodwill rather than for any immediate and direct promotion
of sales for electricity or appliances.
However, where such advertising is political in nature. it must
be listed as a nonoperating expense in subaccount No. 426.4 entitled
"Expenditures for Certain Civic, Political and Related Activities."
This account includes all expenditures incurred, and I quote:
For the purpose of influencing public opinion with respect to the election or
appointment of public officials, referenda, legislation or ordinances (either
with respect to the possible adoption of new referenda, legislation or ordinances
or repeal or modification of existing referenda; legislation or ordinances)
approval, modification or revocation of franchises; and perhaps key in our dis-
cussion today, including all expenditures "for the purpose of influencing deci-
sions of public officials."
PAGENO="0011"
45
Expenditures "which are directly related to appearances before
regulatory or other governmental bodies in connection with the re-
porting utility's existing or proposed operations" are not to be classi-
fied in account 426.4. This is similar to the IRS treatment of direct
lobbying.
As I have previously indicated, categorization of an expense as
operating or nonoperating is often controlling in FPC ratemaking
proceedings. It need not be followed by the FPC nor by State regula-
tory bodies which may permit such costs to be passed along as operat-
ing expenses to ratepayers.
Whatever the exact contours of FPC subaccount 426.4, it is obvious
that it encompasses a broader definition of "political advertising" than
that used by the Internal Revenue Service.
While the cost of advertising which attempts to influence the deci-
sions of public officials in administrative agencies should definitely be
classified as a nonoperating expense under FPC rules, that cost might
currently be a legitimate business expense under the Internal Revenue
regulations to the extent that the advertising does not deal with mat-
ters of legislative concern.
What I am going to do now is really get into the crux of the factual
presentation, Senator, and discuss our analysis of your letter and the
responses which you received.
As I previously stated, with the exception of Mobil Oil Co., none
of the companies to which SenatOr Hart wrote classifies any of its
advertising as political-for example, nondeductible under the tax
laws. Yet an analysis of the ads enclosed with the Senator's letter re-
veals that a vast majority of them are clearly nondeductible and, in
the case of utilities, should also be listed in a nonoperating expense
account.
Although we have examined in detail all of the ads which accorn-
pany Senator Hart's inquiry, as well as other ads, it is not feasible to
refer to each of over 100 ads in this hearing. Therefore, I will now
discuss briefly approximately 36 political ads. And I am submitting
with my statement exhibit D, which is a brief written evaluation cor-
relating all of the ads which could be~considered political with relevant
legislation now pending in Congress.
I would also submit to this subcommittee as exhibit E-attached to
this statement-a list summarizing the energy or environmental legis-
lation now or previously pending in Congress to which the political
ads in question relate.
For purposes of this presentation only I have divided the ads I will
discuss into eight subject matter areas: the Clean Air Act, oil com-
pany profits, offshore oil and gas drilling, the Alaska pipeline, natural
gas prices, nuclear power, utility rate increases, and general compre-
hensive schemes for solving the energy crisis.
I will first discuss advertising related to the Clean Air Act. There
is no doubt tl~at most oil companies and utilities do not favor the strict
control.s imposed by the Clean Air Act. Many of these companies have
run extended propaganda campaigns urging amendment to that law.
For example, a Phillips Petroleum ad, exhibit 39, which is on the
display board; entitled "America's Best Kept Secret: The Cost of
Meeting Federal Auto Emission Standards" argues for changing the
PAGENO="0012"
46
Clean Air Act and adopting the less stringent California standards
for auto emissions.
The ad ends, and I quote. "Time is running out. If you agree with
us that the California standards provide a more practical approach
to the auto emission problems, express your viewpoint to your congres-
sional representatives and to the Environmental Protection Agency,"
end quote.
Most recently, an ad run just last week by the American Electric
Power System, which I would like to introduce as exhibit 100~ asks,
"Are we blind to the real energy crisis?" and argues that, "It is
absolutely imperative that the Clean Air Act be amended in regard
to sulfur dioxide emission standards applicable to electric utilities."
It is difficult to understand how such advertising could be classified
as anything but political for tax purposes in light of the many bills
in Congress on this matter, including one that passed the House last
week.
Yet. Phillips has stated that it intends to take a tax deduction for
its ad.
Significantly, however, Mobil Oil Co. has expressed its intention
to treat its Clean Air Act ads, exhibits 30 through 34, as nondeductible.
Those are in the record for comparison.
I would next like to get into advertising on oil company profits. We
are all familiar with legislation intended to establish an excess profits
tax or roll back oil prices because of unprecedented percentage rises in
oil company profits.
The industry has been mounting an overwhelming propaganda blitz
against this legislation. For example, exhibit 44, a 1974 Shell Oil ad,
entitled "How in All Conscience Can Anyone Call These Excess
Profits?" states, "There is much talk of an excess profits tax," and pre-
sents arguments that any congressional action "should not be a hastily
enacted attack on the independent industry which would impose cor-
porate excess profits taxes based on some arbitrarily chosen historical
performance."
In its response to Senator Hart's letter, however. Shell remarkably
considers this ad to be nonpoliticad and therefore deductible.
In sharp contrast, Mobil Oil Co. has indicated that it considers
its similar excess profits ads, such as exhibit 22, to be political and
therefore nondeductible.
The next subject area of advertising involves offshore oil and gas
drilling. Offshore oil drilling has been a controversial issue for many
years now, involving environmental questions raised by accidents such
as the Santa Barbara Channel oil spill. There have been numerous
attempts in Congress to address this matter, including bills to require
certain permits for exuloring or mining oil and gas underneath the
TJ.S. waters and a bill calling for a moratorium on drilling in the
Santa Barbara Channel.
Yet, with the exception of Mobil Oil, which states that it considers
such ads addressing this matter to be nondeductible, Mobil Exhibits
19 and 23, all other companies have expressed their intentions to treat
similar ads as legitimate business exnenses.
For example, and I draw your attention to the display chart, 17
mid-Atlantic utility companies ran a 1973 ad, exhibit 78, entitled,
"Energy from the sea. The possibilities are out of sight." The ad
urges for rapid development of offshore oil and gas reserves.
PAGENO="0013"
47
All of these companies, including Consolidated Edison and Brook-
lyn Union Gas of New York, claim the ad to be a deductible business
expense. Moreover, the costs for this ad appear to be listed in FPC
operating expense accounts rather than in the nonoperating political
advertising account, 426.4, with the result that ratepayers may be
supporting this political propaganda.
The next subject matter of advertising involves the Alaska Pipe-
line. I think this subcommittee is probably very familiar with legis-
lation that dealt with the Alaska Pipeline. Ever since the Alaska
Pipeline was proposed some years ago, it has been a volatile environ-
mental issue. It finally took an act of Congress amending the Mineral
Leasing Act of 1920, and the National Environmental Policy Act
of 1969, to authorize construction of the pipeline. And the Senate
passed important parts of the pipeline bill by only one vote.
Thus, it seems unbelievable that advertising calling for immediate
construction of the pipeline could be classified as anything but political.
Nevertheless, several companies which ran pipeline-related ads have
already claimed or plan to claim tax deductions for those ads. For
example, several 1971 ads run by Esso Oil, now Exxon, exhibits 9,
10, 11, and 12, have been ruled and this is very significant, in a pro-
ceeding before the FCC to have presented the argument for construc-
tion of the pipeline.
That same year, in response to legal arguments that a pipeline
right-of-way could not be granted by the Federal Government with-
out amending the Mineral Lea.sing Act, a bill to that effect was intro-
duced in the Senate. Yet despite the FCC ruling and the legislation
in Congress, Exxon, in its response to Senator Hart, labels its 1971
pipeline ads as nonpolitical and hence we presume a business expense
deduction was taken for those ads.
Similar tax treatment is intended by Atlantic-Richfield for its 1973
Alaska Pipeline ads, exhibits 3- A, B, and C, and 4.
For example, Arco asks, "What stands between our Nation's energy
shortage and 10 billion barrels of Alaska oil," and poses the issue in
exhibit 3-A, "must it be one pipeline-that is through Canada-or the
other?" The ad argues: "Construction of the pipeline is being delayed
by a fundamental issue now under consideration by Congress. We need
the Alaska Pipeline now. Let's get on with it."
Are we really expected to believe that these ads which ran in the
New York Times, the Washington Post, and the Wall Street Journal,
are nonpolitical? And who can know what the outcome of the Senate
vote would have been if this propaganda blitz had `been conducted on a
smaller scale for fear that the tax laws would be fully enforced?
The next area of advertising involves natural gas prices. Again,
the Senate Commerce Committee is well aware of legislation which
has been pending for some time to deregulate the wellhead natural gas
prices which are established by the FPC.
The American Gas Association, an industry trade group, has adver-
tised heavily in favor of deregulating so that gas prices will be able
to rise.
Exhibit 76, entitled, "The Energy Shortage: What It Means To
You," states that, "The Federal Government and its regulatory agen-
cies," must act, "to set prices at a more realistic level so there will be
sufficient incentive for producers to risk money in the search for new
supplies of gas."
PAGENO="0014"
48
Surprisingly, however, to ourselves and I am sure to Senator Steven-
son, who has introduced legislation in this area, the American Gas
Association does not classify this ad as political. Thus the portion of
dues and contributions to the AGA from member companies which is
being used to finance this and similar ads is apparently being treated
by each member, relying upon the AGA's evaluation, as a deductible
business expense.
In contrast, Mobil Oil's ads calling for deregulation of natural gas
prices, exhibits 35 and 36, were properly classified by Mobil as
nondeductible.
Another area of advertising which is also extremely controversial
involves the use of nuclear power.
The potential hazards and risks associated with the production of
electrical energy from nuclear power sources has led to calls for a
moratorium on the development of nuclear power plants.
Most recently, Senator Gravel addressed this issue, inserting into
the Congressional Record a list of labor, environmental, farmer, and
local governmental groups who have called for a moratorium. Senator
Gravel stated:
If the moratorium movement could match the millions of dollars which advo-
cates of nuclear power spend on public education, there is no doubt in my mind
that the American public would rapidly reject nuclear power.
Persuasion is not a problem for moratorium advocates. Their problem is un-
equal access to the public's mind. In one word, the problem is money.
On the other side, since at least early 1972, bills have been pending
in Congress which call for a more accelerated rate of development and
Atomic Energy Commission approval of nuclear powerplants. Not
unexpectedly, a 1flassive amount of advertising in support of rapid
develop1nent of nuclear power has been disseminated by utility and
oil companies.
Yet, with the exception of Mobil Oil, which recognizes the costs of
such advertising to be nondeductible, all other companies responding
to Senator Hart's letter classify nuclear power ads as nonpolitical and
properly deductible.
Perhaps the greatest offender in this category is the electric com-
panies advertising program, which I will refer to as ECAP, ECAP's
ad is present on the display board. In 1973, over 70 investor-owned
light and power companies participated in the ECAP program which
brought us such ads as exhibit 53 entitled, "Why shouldn't I be con-
cerned about nuclear powerplants?" The ad strongly argues that
nuclear powerplants are safe to operate, and that disposal of nuclear
wastes is stringently regulated. The ad ends by stating:
We need your understanding of this fact. And we ask for your cooperation
in helping to see that nuclear power plants are developed and built as promptly
as possible wherever they are needed.
Another favorite ad run a couple years ago by ECAP is exhibit 55
entitled, " `Mom's Apple Pie Is Radioactive; So Is Mom.' That doesn't
make her a dangerous woman. Radiation is just naturally everywhere,
in the Earth, in your homes, in your food, in your mom." It shows a
picture of mom holding an apple pie which she appears ready to
serve to us.
This is the type of nuclear power campaign to which the public is
being exposed.
PAGENO="0015"
49
Among the contributors to the ECAP program are the members
of the Southern Co. System. Yet reference to the FPC accounting
forms filed by some of the System's members-Alabama Power Co.,
Georgia Power Co., Gulf Power Co., and Mississippi Power Co.-
shows that none of these companies listed any political advertising
costs.
We are left with the conclusion that ratepayers are supporting this
nuclear power campaign through increased rates. Moreover, Georgia
Power Co.'s response to Senator Hart's letter indicates that the com-
pany did no advertising in 1973 which it considers nondeductible;
hei~ce, Georgia Power's view also reflects a clear violation of our tax
laws.
Oil companies have also taken up the fight for nuclear power. For
example, Exxon states in exhibit 7,
We'd like you to know-Today nuclear power supplies five percent of America's
electricity. Tomorrow, it could supply over 50 percent. We need to reach this
goal as soon as possible.
Exxon argues that "environmental objections, labor shortages, tech-
nical problems," et cetera, have delayed the construction of new nuclear
powerplants, and that nuclear power is needed quickly to help make
America self-sufficient.
Yet Exxon claims in its response to Senator Hart's inquiry that it
does no political advertising and can legitimately cledtict this ad as a
business expense.
The next area involved utility rate increases. In a 1973 landmark
decision, the Federal Communications Commission said what con-
sumers and environmentalists had long been contending: that utility
ads which argue for rate increases present only one side of a contro-
versial issue of public importance. In that case, two Georgia television
stations were ordered to present antirate increase views.
One of the ads which gave rise to that controversy is exhibit 69
entitled, "This Is A New Day For Joe," and sponsored by Georgia
Power Co. The ad argues for rates increases. Yet on Georgia Power's
1973 FPC accounting form, neither this ad nor any other of the many,
many on the rate increase controversy in Georgia are listed as non-
operating political advertising expenses under subaccount 426.4.
Georgia Power's treatment of the ad must be compared with the
similar ad, exhibit 71, by Florida Power and Light Co.-that company
told Senator Hart that it considered its rate increase ads to be a non-
operating expense, and nondeductible under the tax laws.
Georgia Power is not alone, of course. Our favorite friend, the
Electric Companies Advertising Program (ECAP) is sponsoring a
nationwide campaign attempting to explain the "combination of
circumstances [which] inevitably means increases in electric rates."
Exhibit 51 is entitled, "Ann's job wouldn't exist without elec-
tricity; would yours ~" It tells consumers that increased plant
expansions require increased rates and that, "We ask your understand-
ing of this inescapable fact." Yet, again, none of the members of the
Southern System list this ad as a political expense on their FPC
accounting forms, though all are members of ECAP.
The correct tax tre~rtment of rate increase ads is more difficult to
predict here. In many cases a rate increase controversy often involves
a request to the State legislature for loans or grants; that is, Con-
PAGENO="0016"
50
solidated Edison has recently appealed to the New York State Legisla-
ture for aid. But if the rate increase controversy seems far removed
from a legislative forum and is confined to State utility commissions
or courts, a strict reading of the current IRS regulations might seem
to permit deductibility.
The last subject matter of the ads which I will discuss involves
comprehensive schemes for solving the energy crisis.
Many companies do not focus on any one solution to the energy
crisis, but instead offer comprehensive plans which combine most of
the aforementioned controversial suggestions plus a few others of
similar nature. In such cases, the ads relate to numerous legislative
bills on wicleranging energy and environmental matters.
Some of these ads are listed on the display chart.
For example, in 1972, the American Electric Power System placed
an ad, exhibit 73, entitled, "Mr. President, We Agree With Your
Message On The Energy Crisis." The ad calls on the President and the
Congress to modify powerplant sulfur dioxide emission standards
under the Clean Air Act and permit for strip mining for coal on
Federal lands in the Far VVest.
The ad also endorsed the President's "directive banning the con-
version of powerplants from coal to oil" and his' "efforts to speed up
nuclear powerplant construction and licensing."
It is hard to accept. therefore. that with legislation pending in Con-
gress on all of these areas. American Electric Power classifies this ad
as nonpolitical and claims it to be a legitimate business expense.
Gulf, Exxon, Continental Oil, and General Motors have run simi-
lar *ads which they classify as nonpolitical. Exhibit 14 from Gulf,
entitled, "We can't talk our way out of the energy crisis," gives Gulf's
proposed solutions to the energy crisis: offshore oil drilling, construc-
tion of the Alaska pipeline, deepwater ports for supertankers, in-
creased nuclear energy, and commercial development of Federal energy
reserves.
In exhibit 6, Exxon asks, "Why energy is short in the United
States" and blames the crisis on a failure to use coal because of `tough
Clean Air Act sta.ndards, delayed construction of nuclear power
plants, and delayed offshore oil drilling in the Santa Barbara Channel
and elsewhere. The ad concludes, "We need to get on with the job of
developing all of the country's energy sources-coal, nuclear power,
oil and gas. We've run out of time for debate and delay. Don~t you
agree?"
In exhibit 5, Continental Oil states that, "America faces serious
energy shortages this winter * * ~" It calls for "an all-out effort to
expand domestic energy resources," including increased strip-minin
of coal, relaxed mine safety laws-one wonders how much more relaxe
they can be-a reexamination of environmental standards, a tempo-
rary freeze on Clean Air Act standards, and mandatory gas and fuel
rationing. CONOCO concludes that "it is up to industry to work
hand-in-hand with the Government" on these matters. I am sure that
is occurring.
In exhibit 93, General Motors advocates_
As a general national policy: (1) de-regulation of %the wellhead price of new
natural gas; (2) an immediate increase in imports of crude oil and refined prod-
nets; (3) construction of pipelines, supertankers, deepwater ports and off-
PAGENO="0017"
51
shore terminals; (4) greater domestic exploration and the prudent drilling for
oil and gas offshore and beneath public lands; and (5) rapid development and
licensing of nuclear power plants.
None of these ads, none of them, and many, many others like them,
were classified as political and nondeductible by the companies re-
sponding to Senator Hart's letter, with one exception: Mobil Oil Co.
For example, exhibit 29, entitled, "Is Anybody Listening? "-we
have a huge exhibit on the chart here which I think most people have
seen in the newspapers-advocates many of the aforementioned
solutions to the energy crisis.
This ad was categorized *by Mobil as political. Yet even Mobil's
approach has some defects-exhibit 27, entitled "The Lady Was
Listening," is intended to rebut many of the arguments raised by a
woman who wrote Mobil in response to the solutions suggested by
Mobil in exhibit 29, "Is Anybody Listening." Yet Mobil did not clas-
sify "The Lady Was Listening" as political.
At this point perhaps we might wonder if we have any laws regu-
lating the tax treatment and FPC accounting treatment of political
advertising. Fairness dictates, of course, that this subcommittee per-
mit the energy-related companies discussed today to respond and
justify their apparently incorrect view of the law.
We are not talking about pennies in these cases-millions of dollars
in taxable income and nonopeiating expenses of utilities are at stake.
This subcommittee must also ask the Internal Revenue Service and
the FPC why violations of Federal laws and regulations are appal-
ently going unnoticed or unchallenged.
More importantly, however, we are left with the sorry conclusion
that just as the oil companies tried to buy candidates with illegal
political contributions, the energy industry is trying to buy the minds
of the American people by dominating the marketplace of ideas with
political ads apparently financed by illegal tax and FPC accounting
schemes.
What policies underlie the tax and FPC treatment of political
advertising? What justifies the current laws, even though they don't
seem to be enforced?
In its 1962 Cammarano decision, the Supreme Court rejected argu-
ments that prohibiting tax deductions for business-related political
ads constituted a violation of the first amendment.
A similar conclusion has been reached in regard to FPC treatment
of political ads. Thus, leaving the constitutional issue aside, I would
like to address one of the main policy arguments against granting tax
deductions for political ads: the inherent inequality of access to the
minds of the public between business and nonbusiness interests.
In its brief in Caqmniarano, the United States argued that there has
been "a continued congressional concern with the use of large sums of
money to finance `the engineering of consent-' to `make' public
opinions on matters of legislation-particularly where large economic
interests are all on one side of the controversy."
I don't think anyone would doubt here that that's the situation with
the energy crisis.
Moreover, no one could doubt that consumer, environmental, civil
rights or similar groups-in contrast to the business community in
general-simply do not have the financial resources to conduct massive
42-367-75----2
PAGENO="0018"
52
national grassroots advertising campaigns on dozens and dozens of
important legislative matters.
Although this inequality exists as well in terms of direct lobby-
ing in the halls of Congress, at least there it is more easily safe-
guarded against through registration and reporting of lobbyists and
their activities, a legislative audience which is likely to be more aware
than the general public of the facts surrounding controversial issues,
and the normal ability of all sides of an issue to present testimony to
congressional committees.
This latter safeguard, I might add, is greatly diminished by the
prohibition on appearances-such as my appearance today-by chari-
table organizations unless invitations are extended.
Section 1962(b) of the Internal Revenue Code and regulations
thereunder which prohibit deductions for grassroots lobbying reflect
a realistic view "that in the twentieth century legislative results can
be seriously distorted by influences operating far from legislative
halls.
The effect of massive propaganda campaigns shouldn't be doubted.
I was informed by a sta.ff member of Senator Harrison Williams'
office that the Senator had received about 12,000 coupons from the
bottom of an ad appearing in New York and New Jersey newspapers
which called for amendment of the Clean Air Act in regard to auto
emissions. So obviously, these ads are at least causing the Postal
Service some additional problems and probably are having some in-
fluence on congressional decisions.
The desire to alleviate this inequality and its often decisive effect
on the legislative process supports the current constitutional tax treat-
ment of political ads sponsored by business interests who engage in
debate with nonbusiness interests.
As Justice Douglas. a champion of the first amendment as we all
know, said in a recent Supreme Court decision, "A State (or Federal)
tax law is not arbitrary although it discriminates in favor of a cer-
tain class * * * if the discrimination is founded upon a reasonable
distinction, or difference in State (or Federal) policy, not in conflict
with the Federal Constitution.
Justice Douglas, by the way, concurred in the Caqmmarano decision
that prohibitions on tax deduction for Political advertising did not
violate the first amendment.
Other Federal laws recognize the inequality between business or
other large financial interests, on one hand, and individuals, non-
profit groups, or other less wealthy interests on the other hand. In sonic
instances, these laws attempt to remedy the inequality by an absolute
prohibition on an activity, rather than the more moderate approach
under the tax laws whereby the activity is merely made more expen-
sive. For example. Federal law prohibits corporations and labor
unions from making certain political contributions to candidates in
many Federal election campaigns. Mr. Justice Powell from the Su-
preme Court, whom one would not identify as being necessarily in
favor of environmentalists or consumers on one hand, nor in favor
of business groups on the other hand, has reflected on a predecessor to
this campaign law, and noted that "public and legislative interest has
focused on limiting-rather than enlarging-the influence upon the
elective process of concentrations of wealth and power." Congress has
PAGENO="0019"
53
also recently been considering legislation to prohibit contributions of
more than a definite sum of money to candidates for office in order to
equalize participation in the political process. The Federal Communi-
cations Commission requires broadcasters to provide free airtime to
non-wealthy persons to counterbalance one-sided programming or ad-
vertising on controversial issues of public importance. This is popu-
larly termed the "Fairness Doctrine." It seems eminently reasonable
that these same concerns should be reflected in regard to the ability
of powerful financial interests to affect the legislative machinery
through intensive propaganda campaigns.
While the same policy also supports the FPC's accounting treatment
of political advertising-that is, that the ability of wealthy, well-
organized utilities to sway public opinion on controversial matters
should be held in check-other important policies are also at stake
in dealing with utility advertising. As the FPC recognized in In re
Alabama Power Company, political expenses have a doubtful rela-
tionship to the actual rendering of utility service. Moreover, it would
be improper to classify political ad expenses in operating accounts
because in the words of the FPC:
It might seem to imply that such expenditures must in due course and without
further question be paid by the ratepayer. Such an implication would be un-
warranted and possibly unfair, in view of the fact that on politically controver-
sial matters, the pinions of management and the ratepayer may differ decidedly.
The unfairness would seem to be generated by the fact that con-
sumers have no choice in regard to utility service-the States and the
Federal Government have sanctioned monopolies to provide necessary
services. While we can even question whether such monopolies should
do any I?olitical advertising at all, at a minimum it seems unjust and
discriminatory for these monopolies to use consumers' money guaran-
teed to flow to utilities by set rates of return, in order to propagandize
those same consumers. I think the following is a beautiful example of
what we are talking about, Senator. The ultimate absurdity is illus-
trated when we consider that some companies, like Georgia Power, per-
mit the costs associated with utility ads which attempt to persuade
ratepayers that a rate increase is needed to be passed along to rate-
pa.yers in the form of increased rates. In other words, we are paying
to have ourselves told that our rates ought to go up to finance in part
the ads for which we are paying. Constitutional, as well as statutory
questions, are raised by this abuse.
Next, I would like to discuss administrative procedures which would
help achieve enforcement of the current tax laws and FPC accounting
rules.
In light of the importance of enforcing current regulations on polit-
ical advertising, and the poor job of enforcement apparently being
done now, we must consider what better enforcement mechanisms
might exist. Several possibilities merit serious consideration by the
agencies concerned and by this subcommittee.
First, labeling of advertisements and their submission to the IRS
and FPC:
Monitoring the thousands of advertisements sponsored each year by
major industries is an enormous task. Even assuming that every ad
could be gathered from various sources, there is presently no way to
knOw of the tax or FPC acéounting treatment of each ad without an
PAGENO="0020"
54
audit. The undesirability of spending already limited agency resources
on such audits is a serious deterrent to enforcement of the law.
These problems could be solved, however, by requiring advertisers to
label each ad, at its bottom, for example, as "IRS/deductible" or
"FPC/#930" to indicate that the ad is considered to be nonpolitical.
Labeling requirements are not new, as evidenced by FTC and con-
gressional treatment of cigarette advertising. Moreover, with their tax
returns and FPC accounting forms, each advertiser should be required
to submit a compendium of all advertising sponsored by it during the
year in question, including a list of all costs associated with the pro-
duction and dissemination of each ad. A second suggestion involves
more specific guidelines to determine whether ads are political. In
contrast to rather detailed guidelines and examples of hypothetical
cases under other legislation, for example, involving the treatment of
estate taxes, the IRS and FPC have done little to delineate the type of
advertising campaigns which might be considered political. For pur-
poses of the tax laws, the following factors, some suggested by Profes-
sors Weaver and Cooper, might give some guidance:
1. Whether there is a reference, explicit or by implication, to some
proposal currently pending before a legislative body.
2. Whether the subject matter is fairly discussed with a presenta-
tion of pros and cons on disputable matters.
3. Whether the particular action or activity which the advertise-
ment encourages is one which involves a conflict of business and non-
business interests on a question of public importance.
4. Whether the problem discussed is suitable for legislative atten-
tion, regardless of whether action or inaction ultimately results.
5. Whether the tone of the advertisement and the manner of presen-
tation is Polemical.
6. Whether readers or listeners are invited to express their views.
7. Whether the nature of the activity addressed in the ad is such that
the disparate financial and organizational resources of business will
normally give business excessive power.
8. Whether the advertiser is pursuing the matter discussed in the
ad in other forums, such as legislatures, public meetings, opinion poll-
ing, courts. agencies, et. cetera.
9. Whether a person of average experience and intelligence would
interpret the advertisement as an effort to gain support for the adver-
tiser's position on some issue appropriate for legislative attention.
Drawing upon these factors, no one of which should be controlling,
and upon prior decisions, the agencies could offer their views on
hypothetical cases.
The third suggestion involves modifying the provision allowing
deductions for institutional advertising. Currently, IRS regulations
provide that expenses incurred for institutional or good will adver-
tising shall be generally deductible provided that such ads are related
to patronage the taxpayer might reasonably expect in the future.
Both corporate taxpayers and the IRS appear to be interpreting the
"patronage" requirement very broadly. First, the regulations define
institutional advertising to include presentation of general social and
economic views. Secondly, corporate taxpayers appear to take the posi-
t.ion that any ad mentioning the taxpayer's name also satisfies the
patronage requirement. This interpretation also seems to have been
PAGENO="0021"
55
adopted by the IRS, which has not challenged the deductibility, it
seems, of most of the "institutional" ads.
Professor Cooper recommends reducing the availability of the in-
stitutional advertising deduction. Specifically, he believes that in any
case where the purported good will advertising presents social or
economic views, or deals with a matter which might reasonably be
expected to become the subject of legislation, it would probably be ap-
propriate to presume that the ad is generally nondeductible. The bur-
den would then be on the taxpayer to demonstrate that the ad had no
substantial purpose other than to promote the sale of the taxpayer's
goods or services, or to achieve some other ordinary and necessary
business goal that properly supports deductions. This regulation
would have the effect of in Professor Cooper's words, "restraining
propaganda masquerading as goodwill advertising," which seems to
be the situation with which we are faced.
Another area would be better control over treatment of dues and
contributions to trade associations or similar industry-oriented groups.
IRS regulations do not allow a deduction for a pro rata portion of
dues paid by a taxpayer to a trade association if a substantial part of
the association's activities involves grassroots lobbying. The IRS at
one time indicated that a 5-percent test would be used to determine
what constitutes a "substantial amount" of impermissible activities.
That is if the industry group was expending 5-percent of its money
to do lobbying, deductions to that group on a pro rata basis by cor-
poi'ate members would not be deductible.
Professor Cooper points out that the 5-percent nile does not aid in
determining whether the test is based on man-hours, dollars of ex-
penditure or some other criterion. He recommends that the substantial-
ity test be based on multiple factors including dollar amount, man-
hours, and absolute amount of grassroots lobbying, and so forth.
Moreover, when oil companies contribute to the American Petroleum
Institute, or utilities to the American G-as Association or the electric
companies advertising program, the members seem to rely upon their
trade associations to properly apportion contributions and dues among
deductible and nondeductible categories. Thus, a comprehensive audit
must include an audit of the trade groum as well as its individual
members. The burden on the IRS of the FPC to conduct such investi-
gations could be eliminated by requiring each trade association to label
its ads, report all costs associated with each ad, and file a compendium
of its ads with each agency. as the individual members would be re-
quired to do.
Next, and perhaps this goes without saying, there is simply no ex-
cuse for the FPC to have allowed utility companies to fail to properly
itemize their political advertising exuenditures in subaccount 4~6.4.
One reason for this might be that the companies have been doing
th1s for years. We have examined the FPC forms that show this.
- The companies probably see little reason to change. Strict penalties
on violators would serve as a deterrent to the current sloppy, or per-
hans intentionally misleading, approaches.
Lastly. and I think this is most important~ we need a system whereby
citizens could challenge treatment of political ads. The ultimate bene-
ficiary of the tax and FPC advertising laws and regulations is the
public; citizen input into decisions on important `controversial issues
PAGENO="0022"
56
should not be dihiteci by industry propaganda campaigns financed
through ta.x subsidies or utility rates. Hence, it is imperative that
those whom the laws seek to P1otect should be able to enforce those
laws.
Moreover, there is a practical reason for allowing formal citizen
complaints: Citizen groups which take a position adverse to that
taken by an advertiser are often in a better position than the IRS
or the FPC to asses an ad on a legislative matter. Groups like~ environ-
mentalists or consumers are well aware of pending legislative pro-
posals and the full range of corporate activities which are intended
to influence those proposals.
The Federal Power Act and FPC regulations recognize the valid-
ity of these views and permit citizen complaints which must be an-
swereci by utilities and for which there is appellate review of any
adverse rulings. I want you to knOw, Senator, that we intend to take
advantage of th~se provisions, based on the information we now have,
~n the very near future and will be acting in regard to the. FPC.
In sharp contrast, however, the Internal Revenue Code and IRS
regulations do not provide a similar procedure. The only formal
means of complaining to the IRS about tax treatment of an adver-
tisement is through the regulations providing for rewards for infor-
mation relating to violations of tax laws. Under that law persons sub-
mitting information leading to the detection of violations are given
rewards, which is not and should not be our main concern.
\~\Thile we intend to send our evaluation to the IRS in accordance
with this provision, the regulation is nevertheless inadequate. We will
never be able to learn whether the IRS finally agrees with our evalua-
tion, and more importantly. even if that information were available,
there is 110 express provision for judicial review if the IRS decides
to permit the costs associated with these ads to be deducted. Only if
the IRS decides against deductibility, that is against the advertiser,
is there appellate review and that is at tile instance of the corporate
advertiser.
The inadequacy of the present scheme for citizen participation is
illustrated by a 1971 occurrence in which former U.S. Senator Fred
Harris wrote to IRS Commissioner Walters urging denial of a cor-
porate tax deduction for dues paid by corporations to "Citizens for
a New Prosperity"-CNP-a. group organized to promote the eco-
nomic policies of the curreiit administration. CNP's activities included
running full-page ads espousing' the success of present policies. Tile
IRS Commissioner, Mr. Walters, replied to Senator Harris' letter
stating that "a determination as to the deductibility of amounts con-
tributed must he made on the basis of all the facts and circumstances
in each case * ~" According to the Senator, the full response
"amounted to a~ fiat rejection of my suggestion." Similar t.rea~ment
was accorded Mr. Richard Lahn, a `memi~er of the Sierra Club, who
complained about the deductibility of a Washington Gas Light Co. ad.
Mr. Lahn never learned of the eventual IRS treatment of that ad.
There would seem to he no reason why the IRS could not adopt
an administrative scheme which would provide for more meaningful
citizen enforcement of the congressional policy against deductions
for political advertising. If the IRS claims that it does not possess
the power to set up that scheme, this subcommittee might consider
amendments to the Internal Revenue Code in that regard.
PAGENO="0023"
57
Last, since I have just dealt with the procedural changes, I would
like to discuss what substantive administrative and statutory changes
would more adequately remedy the problems associated with cor-
porate political advertising. The current laws and regulations, even
if fully enforced by the IRS and the FPC, do not adequately protect
against possible abuses resulting from an inequality in access to the
channels of communication. There are many important substantive
changes which should be made in the present laws and rules to fur-
ther safeguard against the effects of massive business propaganda cam-
paigns and their subsidization by taxpayers and ratepayers. I will
outline but a few of these changes now, and will submit to the sub-
committee at a later date a more comprehensive memorandum which
will also form the basis for action we plan to take before the IRS and
the FPC in this regard.
First, the IRS should readopt its pre-1965 regulations prohibit-
ing tax deductions for costs associated with the exploitation of
propaganda.
As I have previously indicated, pre-1965 IRS regulations appear
to have taken a broader view in favor of nondeductibility. Specifi-
eal]y, expenses associated with "the exploitation of propaganda"
were not to be deductible. Thus, a utility which advertises in favor of
increased rates or a corporation which advertises in favor of the
virtues of private enterprise and a laissez-faire economic theory now
could arguably deduct the costs of that campaign as a business ex-
pense. This would respresent a reversal of the IRS policy which was
judicially approved in the Southwestern Electric Power Co. cas~
In that case, the court ruled that although the advertising in ques-
tion was not primarily aimed at promoting or defeating legislation,
its general arguments in opposition to expanded governmental intru-
sion into .a private utility system constituted "exploitation of propa-
ganda" which was not a legitimate business expense. The 1962 amend-
ment t.o the Internal Revenue Code did not authorize the IRS to
retreat from its rules recarding "exploitation of propaganda ~" and
the IRS must be asked if a retreat has, in fact, becurred: if so, it
should justify the change or else reverse itself again.
At a minimum, however, the IRS rules should not permit deduc-
tions for ads which attempt to influence the public, or members of
administration a~encies~ on agency matters. While the 1962. amend-
ment passed by Congress wa~ based, in part, on recognition of the
then-existing policy that expenses for direct lobbying of a~'encies ucre
tax-deductible, it left undisturbed IRS treatment of indirect lobbying
of these agencies. We cannot doubt that independent agencies and
those in the executive branch both exercise and broad legislative-type
functions in many areas; even when they act quasi-iudicially~ their.
standard is the "public interest," a broad one. The insidious effects
of corporate advertising campaigns may be even more pronounced,
and less visible, when regulatory agencies are the target than when
the target is a more visible decisionmaking body such as Congress.
If the IRS does not agree to amend its regulations to safeguard
against these abuses, then Congress should modify section 162 (e) of
the Code to effectuate these changes.
Next, the. FPC's accounting classifications for advertising should
be conclusive for ratemaking purposes in Federal . and State rate-
PAGENO="0024"
58
making proceedings. Under present FPC accounting rules, an adver-
tising expense listed in a nonoperating account may still be passed
along to ratepayers in Federal as well as State ratemaking proceed-
ings. With the advent of national advertising campaigns in news-
papers and magazines and on network television, the accounting and
ratemaking problems associated with classifying advertising costs
have become too difficult for 50 different State agencies to handle.
One can only imagine the Idaho Public Utility Commission attempt-
ing to audit advertising costs incurred by Idaho Power Co. for ECAP
ads which appeared in the New York Times or in Newsweek magazine.
At a minimum, under the present Federal Power Act, as pre-
sently constituted, the FPC's ratemaking jurisdiction over interstate
transportation or wholesale sales of electricity provides a basis for
exercising pendant jurisdiction over the advertising-related costs
associated with intrastate consumer sales. If the FPC refuses to so
act, Congress can require uniform ratemaking treatment of advertis-
ing expenses by States and the FPC according to FPC rules by
amending section 205 of the act.
It is quite possible that the FPC already has express jurisdiction to
set uniform ratemaking policies which would apply in State as well as
Federal proceedings without the need to use the pendant jurisdiction
theory. This would be based on a 1972 Supreme Court decision, Florida
Power ~ Liqlit. In any event the FPC has not chosen to decide whether
it has that jurisdiction. Under uniform rules the FPC could prohibit
the cost of all political ads from being passed along to ratepayers and
consumers. Rates not reflecting this policy would be classified as un-
reasonable and discriminatory.
The last suggestion I have for substantive change would require the
FPC to require any utility engaging in political advertising to make
response time or space available to ratepayers with opposing views at
the expense of the utility.
The ability of monopolistic utilities to effectively force ratepayers to
subsidize propaganda campaigns with which they do not agree raises
serious constitutional questions. As the Supreme Court said in the Red
Lion Broadcasting case:
It is the purpose of the first amendment to preserve an uninhibited ma rket-
place of ideas in which truth will utimately prevail, rather than to counte-
nar~ce monopolization of that market, whether it be by the government itself, or
a private licensee.
In response to these concerns, the FCC and Congress have required
broadcast licensees to provide free response time to opponents of one-
sided progTaming or advertising. The FPC should similarly require
all utilities subject to its jurisdiction to subsidize response time or space
for ratepayers with views contrasting with those expressed in utility
company newspaper, magazine, television or radio advertising, or in
utility bill inserts. At a minimum, the. fairness doctrine should be
applied where the costs of such propaganda are borne by ratepayers
as the result of State or Federal ratemaking proceedings. Yet, the
fairness doctrine might even be applied where the costs of such ad-
vertising are borne totally by shareholders, since the utility wo~ld
otherwise be neglecting its mandate to protect its ratepayers as well as
its stockholders if put its prestige behind the advertising of policies
which rewarded its private investors at ultimate public expense.
PAGENO="0025"
59
In conclusion, Senator, I would like to say that I think we have
posed many questions which are only answered tentatively in this testi-
mony, and there remain many other questions which I have not even
addressed, such as the propriety of permitting tax deductions or FPC
operating expense credit for advertising which promotes the use of
energy when we are in the midst of an energy crisis.
Perhaps if we have learned anything from your inquiry and this sub-
sequent analysis, it is that there appear to be serious shortcomings in
the ability or the desire of two important Federal agencies-the IRS
and the FPC-to enforce current laws and regulations regarding polit-
ical advertising. The resultant effect seems to be continued advertising
abuses by many giants of American industry who have already caused
us to mortgage our bodies and homes for their gasoline and electricity,
and yet who now want us to give them our minds as well.
To a large extent, the tools to prevent these abuses are already here;
the memb&rs of this subcommitee, as well as all citizens, must ask why
they are not being used by the agencies authorized to protect our rights.
We, as taxpayers and utility rate payers, have an interest in insuring
that millions of our dollars are not spent to subsidize one-sided polit-
ical propaganda, and a greater interest in insuring that our demo-
cratic system does not consequently fall into the hands of those with
concentrated power and wealth who profess to bring "power to the
people."
I apologize for the length of the statement, Senator, and I thank you
for permitting me to present it today.
Senator HART. Mr. Shulman, thank you very much for an analysis
of the problem we are considering, an analysis which is, I think, ex-
tremely well researched. And comprehensive.
I will unnerve you and our next witness, who I understand is a tax
lawyer, by saying that you are talking to a lawyer, who, when the first
suggestion of a tax problem surfaced in his practice always ran around
the corner to get his partner who was a tax man.
I early understood that I wa~s never going to understand tax law.
It would be an utter waste of time for me to try. That's 25 years ago.
And I discovered in the passage of time my understanding of it has be-
come even duller.
`So while I say that your research is magnificant and you have made a
significant contribution to my understanding of the problem, I still
identify myself as somebody who, when it comes to tax law, never got
beyond, well, 4 or 5 times tables, certainly not up to 9 or 10.
But the things you have discussed are certainly of enormous impor-
tance to us as a people as we seek to identify the correct actions to take,
both to protect the environment and to avoid disabling ourselves eco-
nomically by a shortage or wastage of energy.
And you correctly suggest, as I intended that we invite those whose
advertising practices have been brought into question here to explain
their view of it.
Following that, theoretically, I should have a better understand-
ing, probably I will be more confused than ever in any event. Intelli-
gent readers can then make that kind of judgment.
And I am not suggesting by indicating my desire that we suspend
judgment until we have heard from the others any disrespect for
your presentation. We welcome and appreciate it.
PAGENO="0026"
60
Before turning to the questions, let me try to clarify a little further
for the record some of the responses that have come in to the letter
that you have indicated I sent.
Several times you referred to the fact that a company, a given
company or group of companies, did not characterize the ad in ques-
tion as political or nondeductible. ~\Thile those statements are true,
I think it appropriate to acid that in a number of situations, the corn-
pa~iy responding rejected tile classifications in my letter.
So in a number of cases \vhile it's true that the company didn't
characterize the ad as nondeductible or political, neither did it classify
the ad as deductible or political. I just wanted to characterize the
ad in fashion-it simply went on to characterize the ad in a fashion.
Also, on a number of occasions, you mentioned that Mobil did not
deduct expenses for ads which others characterized as nonpolitical,
and again that is a correct, accurate statement. But I would like to
have tile record include the full text of Mobil's reply to my letter.
Specifically, I would like it to show the following paragraphs of
that response. Let me read the several paragraphs which I think are
of special significance:
For your convenience, there is enclosed a complete set of 1973 newspaper and
periodic public service advertisements divided into four groups, the first three
of which we believe and are advised constitute institutional or goodwill advertis-
ing. Group IV contains advertising which we believe to be in the public interest,
but which contain sufficient legislative poteiltial to be regarded by ourselves and
outside counsel as possibly falling in tile non-deductible category, and are there-
fore treated as non-deductible for tax purposes.
Group IV. the non-deductible category, covers a variety of subjects including
a number of advertisements grouped under tile general category of "the $66 billion
mistake" relating in part to regulatory policies on antipollution control, and
general information on the energy shortage.
There are some 23 advertisements or brochures in this group. While none of
these, ill the opinion of counsel, is clearly non-deductible, no absolute assurance
can be given by counsel that a deduction would be upheld and therefore, as
noted above, this group of advertisements is treated by tile Company as non-
deductible.
Tile letter in full will be presented. I think it will be useful.
Now, I take it that you feel that a large number of tile ads which
you submit as exhibits are nondeductible. Can you indicate what
percentage of the ads, in your judgment should be treated as non-
deductible?
Mr. SInmxrAx. Senator, your letter of inquiry included questions
on the tax treatment of 99 ads. Many of those ads which 37011 have
submitted. before they were sent out as I understand it, were felt,
I know hr ourselves when we gave them to the staff, and I believe
by your staff, to be properly deductible. Of tile pile we originally
dealt wItil (99 ads) we felt perhaps 15 or 20 of those might be
deductible.
Some of these are conservation ads, or Middle South Utilities
acTs u-h~cll talk about how the Soutil is expanding economically. Let's
say. working from a base of 80 remaining acTs, in my opinion-based
011 this analysis, extensive study of the iegislation pending in Con-
gress, extensive research of prior IRS decisions and court decisions
Oil tile matter-we have come to the conclusion that over 90 percent
of those remaining ads probably should. be categorized as political
and therefore nondeductible.
PAGENO="0027"
61
So we are talking about an awful lot of money.
Senator HART. I am told, and I have not had opportunity to read
more than a very few of those ads, that only a few of them explicitly
solicit the reader to write their Congressman to support or oppose spe-
cific legislation.
Rather, that the bulk of the ads do not mention the Congress or
the fact that legislation is pending here on the subject that is discussed
in the ad.
Now, someone who would characterize these ads as deductible, I
suspect, will say that an explicit solicitation to the reader to write
his Senator or Congressman about identified legislation is needed
before the ad becomes nondeductible. \\That test do you apply, how
would you answer that argument?
~Ir. SI-JULMAN. As I suggested in my statement, Senator-and two
well-known tax professors, Cooper and Weaker, incorporate some of
these suggestions in law review articles they have written-one should
not find any one factor to be controlling on the question of deducti-
bility or nondeductibility.
So for example-
Senator HART. Yes, but if I understood your testimony don't they
suggest that there should be a number of factors considered?
Mr. SHULMAN. Yes, sir.
Senator HART. Aren't they writing on the assumption that those
multiple factors are not included and rather that only the solicitation
to write your Congressman and the mention of 5. 2927 are the only
things considered?
Mr. SHULMAN. It is conceivable, although I can't think of an in-
stance now where people would be asked to write their Representa-
tives or Senators on matters not relating to legislation just to show
them their views on, perhaps, supporting the President.
Just because an ad said, write your Senator or Representative and
let him or her know how you feel, wouldn't make that ad necessarily
relate, to legislation. So that what I'm saying is that the tag at the
bottom is really not controlling.
On the other hand, I think, I hope we would all agree that ads
which fall within some of the other factors-for example, that clear-
ly discuss controversial items even though there isn't a tag at the
bottom~ "u-rite your Representative or Senator"-those ads should be
considered clearly to be nondeductible.
Now. some of the ads which we have submitted are in fact of that
sort.. The Phillips ad, in particular, is of that sort, but more im-
portant., Senator. I think that that limited view of the IRS regula-
tions and the Internal Revenue Code just isn't the law today.
In a 1970 decision, the sixth circuit, in talking about advertising
by Consumers Power Co., a Michigan utility, indicated that the cur-
rent IRS regulations which talk about, "In connection with any at-
tempt. to influence-"
S~nat.or HART. Are you reading from-
Mr. STTLLMAN. I'm reading from my statement.
This is what the Congress 1?assedl in 1962, when it said that the
new law in 1962 should not he construed as allowing deductions for
any amount paid, quote, "in connection with any attempt to influence
PAGENO="0028"
62
the general public or segments thereof with respect to legislative mat-
ters, elections or referendum."
Well, in C (4) now, the definition of-of influencing the general
public on legislative matters-is included at the top of page 11. And
the definition is that "promotion or defeat of legislation includes, in-
cludes but shall not be limited to expenditures for the purpose of
attempting to influence members of a legislative body directly or in-
directly, by urging or encouraging the public to contact such mem-
bers."
Mr. KUNSTADT. I might point out in the language that section lit-
tle "i" is the source of the test, the urging of contact of the Sena-
tors. Since that is only given as an example, it's an improper inter-
pretation of the regulations to say that that is a necessary test, and
unless you meet that test, the ad is nondeductible.
Senator HART. Does that Consumer Power Sixth Circuit case say
that the-
Mr. SHULMAN. Well, we have-
Senator HART. That it is not inclusive ~
Mr. SHULMAN. We have two cases, Senator.
In the sixth circuit, sir, a 1970 case, there were advertisement~ in
which Consumers Power participated; the ads were sponsored, by
ECAP. electric companies advertising program.
I will quote in part from the court opinion:
An examination of the materials used show that the advertising campaign
had a twofold purpose: Explaining how electricity can make for more comfortable
living, and pointing out the bad features of publicly owned electric power com-
panies as compared to privately owned companies.
The advertisements for which the district court disallowed deduc-
tions were the ones which in some way attacked public power. Many
of the disallowed advertisements made a hard-sell attack on public
power, calling it creeping socialism, while others simply suggested
that private power companies can provide faster service because, un-
like the publicly owned power companies, there was no waiting to
have funds appropriated for the needed electrical facilities.
Many of the ads were directed toward the Tennessee Valley Author-
ity. And several (this is important, several, but not all of them)
admonished the public to let their Congressmen know how they felt
about governmental ownership of electric power companies.
The court recognized that in some instances where no legislation was
pending, an advertisement which simply conveyed a competitive mes-
sage should not be considered to be nondeductible.
Nevertheless, in this case, even though there was no legislation pend-
ing, and even though not all of the ads told readers to contact their
Congressmen, these ads were in fact ruled nondeductible.
A more appropriate case is a 1965 case in the Court of Claims,
Southwestern Electric Power Co., in which the a ds. as I noted in my
testimony, were intended to wa.rd off further Federal Government
intrusion into a private utility system; no legislation at all was
involved. The ads talked about socialism and Government ownership.
The court says, referring back to the application of the Cammarano
case. "legislation had already been pa.ssed in this case, so we cannot
categorically say that the advertisements here were primarily aimed
at promoting or defeating legislation. What then remains in the regu-
lation which could deny deductibility? We think the important. lan-
PAGENO="0029"
63
guage is this: The exploitation and propaganda including advertising
other than trade advertising."
In those ads, there was nothing that asked members of the public
to contact their legislators. Again, though that is under the old regu-
lation, it stands for the principle that to be a nondeductible business
expense there need not be necessarily a line on the bottom asking that
representatives be contacted.
But, more importantly, as a practical matter, if we required that
line to be present on all ads before the IRS would rule them to be
nondeductible, we might not even need a tax law in that regard, be-
cause companies would use the full text of their ads to lobby to their
heart's delight, trying to leave this obvious conclusion in the mind of
any intelligent person: if things are the way they are stated to be in
the ad, the reader should do what is learned in sixth grade, and write
his Senator or Representative and tell him or her to do something
about it.
Senator HART. I indicated that we ought to reserve judgment on the
specific allegations, if that is a fair characterization, that you have
made about some of these ads. There is one point, one statement in your
testimony on which I don't have to be tentative or reserved at all. It is
that, in your judgment, there is a legitimate function of Government to
attempt to remedy the imbalance in the viewpoints that we in Congress
do carry between the interests that can readily afford to buy an ad,
and interests that somedays hasn't the money to buy the newspaper.
And I think that it may not be sufficient merely to provide for tax
disincentives for lobbying by organizations organized for profit.
We may have to look in the direction of more favorable tax treat-
ment for the lobbying efforts of those not organized for profit. That's
a real slow-ball question to throw to you. How do you react to it?
Mr. SHIJLMAN. I am in agreement, Senator, with your sugestion that
charitable and educational organizations who possess vast amounts
of expertise on matters pending in Congress should not have to be
waiting in the wings somewhere for the golden opportunity that a
staff member might find out about who they are and call them up and
ask them to submit their comments to a congressional committee on
pending legislation. It seems to me that, outside of providing an in-
centive to such nonprofit groups, it just doesn't make any sense to pro-
hibit people who know an awful lot about matters that Congress is
dealing with from being able to express their views.
Outside of that, I do agree that at least as regards direct lobbying,
submission of statements to committees or members there of or testi-
mony before committees, the restrictions on charitable organizations
are unnecessary and unwise. And in fact, if Congress was concerned
about a disequilibrium situation, inequal access, as you suggested, a
good way to remedy that problem would be to open up the avenues to
Capitol Hill for charitable organizations.
Senator HART. In your testimony you have this paragraph:
In its brief in Cammarano, the United States argued that there has been "a
continued Congressional concern with the use of large sums of money to finance
the engineering consent to make public opinions on matters of legislation, partic-
ularly where large economic interests are all on one side of the controversy."
That is the end of the quote from the case. And you continue-
PAGENO="0030"
64
Moreover, no one could doubt that consumer, environment, civil rights or
similar groups, in contrast to the business community, simply do not have the
financial resources to conduct massive national and grassroots advertising
campaigns on dozens of importantlegislative matters.
To which anybody around here would say, sure that's true. But you
have omitted a group, very large in number, with respect to whom
it is dramatically true, and that's the poor. There is the extreme. The
elimination of poverty would do lucre to reduce almost all the prob-
lems that confront us in any other one single thing-race relations,
health. And that's the one group who, by very definition, never will be
able to run an ad to attract a nickel's worth of attention. So surely we
should try to figure out a way to get some balance into that imbalance.
Mr. BICKWIT. In your own view, does the media bear any responsi-
bility for the imbalance that exists, and if so, what would you suggest
that they do about it?
Mr. SIIULMAX. I think we have to distinguish between the electronic
media radio and television and the print media. There are different
Federal regulations which apply to electronic media, whereas there are
virtually no regulations applicable to the print media. I suppose that
to a large extent, I believe, the media generally is doing a fair job of
reporting both sides of the energy crisis in its news, documentaries,
interviews shows, etc. I think the large imbalance results from the
infusion of these billions or millions of dollars of commercial adver-
tismg by oil and utility companies which are really a different sort of
campaign, of information dissemination than the broadcaster-spon-
sored programs.
You have very, very dramatic ads which are intended to appeal to
the emotions, rather than to any necessarily intellectual aspect of the
individual. The press, and of course the broadcast media, shy away
from presenting in their news similar emotional approaches to the
presentation of counterinclustry views. I suppose if an environmental
group w-antecl to buy an ad opposed to nuclear power and put. it On
the television, if it could afford to do so, the station would run it. But
the station is doing little to tone down the debate in some of the oil ads
which we see on television. And I think it's the same for newspapers.
I suppose the stations could make free advertising time available.
This is what we requested in our FCC letter. And out of 6,000 stations
we have written to, I think we have gotten responses from about 600,
many of whom have agreed to run consumer-orientedl spots. But re-
grettably, two networks, NBC and CBS, I believe, did not find the
spots which your fellow colleagues in Congress provided the networks
to be appropriate for presenting consumer viewpoints on the energy
crisis.
In the print media, as I say, there are no regulations or laws that
really apply, although there have been some attempt by environmental
groups, such as Environmental Action, to request counter ad space free
of charge. A letter was sent from Environmental Action on March 4,
to the ombudsman of the Washington Post, requesting that the Post
give free space to an environmental group to present views opposed to
some of the industry positions that we see on the "op. ed." page or
similar places. As far as we know, as recently as last week, the Post
hadn't replied affirmatively.
Mr. BIGKWIT. I am sorry, I didn't hear that.
PAGENO="0031"
65
Mr. SHTJLMAN. The Post has not replied affirmatively to this request.
We know that some publications such as Playboy, and I believe Time,
do devote free advertising space to citizen groups, but they are on
generally noncontroversial issues. It's generally not the energy crisis.
There is a vast array of things that could be done. I have just sug-
gested a few that don't involve legislative remedies, but are really
voluntary actions that might be taken.
Mr. BICKWIT. If on reflection, some that do involve legislative reme-
dies occur to you, it would be appreciated if you could make those
available for the record of this hearing so that the members of this
committee could study it.
You have supported tax and FPC accounting disincentives with
respect to grassroots lobbying. Presently there is in the Congress com-
mittee legislation which would apply the accounting disincentives at
least to promotional advertising by utilities in this time of energy
shortage. I gathered from a closing remark that you do in fact sup-
port that approach. Am I correct in that, and if so, could you elab-
orate?
Mr. SHULMAN. Yes, most definitely. I can't imagine, I don't see how
anyone can imagine, the need for utilities to promote increased use, or
any use of natural gas, electricity, or oil in a time when we are having
problems keeping people warm in Michigan or Minnesota in the win-
ter because there isn't enough oil to go around. So that an outright
prohibition on promotional advertising might even be appropriate.
Several State utility commissions have done this. At a minimum, it
would seem to me the FPC ought to change the promotional adver-
tising a~count from operating to nonoperating so that any promo-
tional advertising which does occur would not be subsidized by rate-
payers. This could be effectuated by legislation as well. If anyone
thinks that utilities are not still promoting gas or electricity, well, one
of the ads which the Senator sent out in his inquiry is by the Southern
Co., exhibit 98. It's entitled "Misconception." I quote, "Misconception:
it doesn't make sense for utilities to promote the use of electricity in the
face of an energy crisis. Fact: energy must be available whenever
and in whatever quantity needed. Customers require it." I won't read
the whole ad, but essentially, what the ad says is that people really
ought to use a lot of electricity this winter so that the use won't fluc-
tuate, so that the company could make better use of its existing facili-
ties. This ad was run last September.
Yet as recentlyas last week, in a far more subtle attempt, the WTash-
ington Gas Light Co., ran this ad in the Washington Post. You don't
have a copy of it, so I will mark it exhibit 101, and give it to you. The
ad is entitled, "Give Up Old Faithful, So You Can Give Up Oven
Cleaning with a Modern Gas Range." The general text of the ad
encourages people whose~old ovens now need replacement to replace
them with new gas-powered, self-cleaning ovens. While I don't pro-
fess to know very much about. self -cleaning ovens, from what. I under-
stand, self-cleaning ovens, at least the electric type, require more
electricity to do the cleaning in addition to the cooking. I assume it's
the same thing with a gas self-cleaning oven. But more importantly,
there is masqueraded in the ad a little paragraph at the bottom that
says "Eligibility for gas service. In order not to jeoparidze the supply
of gas for existing customers, no new applications for gas service are
PAGENO="0032"
66
presently being accepted. However, if your home uses natural gas for
any purpose, you are entitled to replace or add gas appliances."
Obviously, this is an attempt to sell more gas appliances and to
increase consumption of gas in individual households which are
already using gas for more limited purposes.
So promotional advertising is still going on. I don't know how this
ad is classified. It probably is promotional and will be reported in
FPC account 913 and will be a legitimate operating expense and
probably passed along to rate payers. I don't think there is any rhyme
or reason in that treatment.
Mr. BICKwIT. I gathered from the remark the chairman made that
he interpreted your analysis of Cooper & Weaver to support the
proposition that under present law, the tag, "Write your Congress-
man," is the only thing that is considered by the service and the courts
in deciding whether an ad is deductible. I don't think that was the
impression you meant to convey.
Mr. SHULMAN. No, sir, I think by my quoting from Consumer's
Power and Southwestern Electric, I meant to indicate that the tag in
many cases is, in fact. irrelevant. The absence of a tag is irrelevant.
Mr. BTCKwIT. If I understood you correctly, you didn't mean to
convey that Cooper & Weaver think that is the only thing that is
considered at this point as a relevant matter in deciding a question
of deductibility.
Mr. SHULMAN. That is true; they consider several factors.
Mr. BICKwIT. On the Uo~wumer Power case, in that case, the court
of appeals deferred to the judgment of the district court on a question
of fact, did they not?
Mr. SHULMAN. Yes, that is correct.
Mr. BIoRwIT. Do you happen to know what the charge to the jury
was at the district court level? I would doubt it, in view of the fact
that it doesn't appear in the reported case.
Mr. SHULMAN. Well, do you have the district court opinion, or the
cite for the district court opinion? In case you don't, it's 299 Federal
Supplement, page 1180. I believe this may not `be a jury case. I believe
it may have been tried before a judge. In that case, there would obvi-
ously be no charge to the jury.
Mr. BIOKWIT. If it turns out that it was a jury case, it would be
very useful for this record to know what the charge of the jury was.
If that could be made available, we would appreciate it.
Mr. SHULMAN. OK. However, looking quickly at the district court
case, it says the case has been presented to the court on a stipulation
of facts, supplemental stipulation of facts, testimony adduced at trial,
and exhibits submitted with the stipulations and those introduced at
the trial. The court has also had the benefit of a series of briefs sub-
mitted by the parties seriatim. Plaintiff requests findings of fact `by
the court-that is, the judge. In addition to those contained in the
stipulation, a copy of the stipulation of facts and supplemental stipu-
lation of facts is appended to this opinion. I will check, but I don't
believe that this was a jury case.
Mr. BIGRwIT. Your point is, as I gathered from your remarks to the
chairman, that if it was a jury case, the charge could not have been
PAGENO="0033"
67
that, unless you see a tag saying "write your Congressman," this ad
is deductible. You can reason that from the holding of the case; is
that correct?
Mr. SHULMAN. I think that goes without saying. As I said, just
from commonsense. Otherwise, every company that wanted to run a
political ad would just omit the words, "write your Congressman."
They might put in something, "what do you think?" They might
say, "that's bad." There would be so many ways to circumvent the
law that there wouldn't be any law to enforce.
Mr. BICKwIT. And if it were a case decided by the judge, or a fact-
finding of the judge, then his charge to himself could not have been
the charge that I just gave you?
Mr. SHULMAN. I think that's correct.
Mr. BlcKwrr. I would like to thank the witness. Thank you, Mr.
Chairman.
Mr. SHULMAN. Thank you.
Senator HART. There was one suggestion you had that I wanted to
make a comment on. The Power Commission and IRS would have an
overwhelming problem in auditing or reviewing the massive amounts
of advertising, as you imply. But to permit them a better shot at insur-
ing compliance with whatever the law is, why not require the ads to be
labeled and identified, like, "not printed at public expense" on our mail-
ing, which I am not sure is always literally true, either, but anyway,
some slug line that would alert the reader as well as the Bureau or the
Power Commission as to the deductibility of the ad. Then the com-
panies would be required to include a compendium with their tax re-
turn or Power Commission filing of the ads. Also, it seems desirable
to encourage IRS to set up a number of hypotheticals to make it a more
predictable business for the tax counsel.
I see the desirability of it, but the usual uneasiness exists in promot-
ing the proposition that you should be allowed to go into IRS and
argue over the taxpayer's return. This is a very difficult thing to re-
solve. There is a lot of complication.
If life is ideal you could separate the specifics on the appropriate
occasions and insure against abuse and go ahead. But I don't know
whether we can. But the suggestion certainly should be considered.
Thank you.
Mr. SHULMAN. Senator, just one brief comment in that regard. The
FPC already permits the rate pairs to come in and challenge treatment
of advertising engaged in by utilities. And there hasn't been a great
rush to the FPC door to police these things. Therefore, if that were
permitted in regard to tax treatment of ads, and perhaps the incentive
for reward removed so that the only basis for the challenge would be a
belief that the ad was improprely trying to influence the legislative
process, I really can't imagine waiting lines at the district court trying
to challenge the services, tax treatment of these things. Thank you
very much.
Senator HART. Thank you for your interesting and thoughtfully
prepared testimony.
Mr. SH1JLMAN. Thank you.
42-367-75-----3
PAGENO="0034"
68
[The exhibits referred to follow:]
ExHIBIT A
CORPORATE PUBLIC SERVICE ADVERTISING
JANUARY 28, 1974.
DEAR -~- The Subcommittee on the Environment of the Senate
Commerce Committee has received numerous inquiries about what has been
termed corporate public service advertising. We have obtained some such ad-
vertisements, copies of which are enclosed, which explain our current energy
crisis and proposed solutions to it. We would be happy to receive copies of any
of your other advertisements which you feel are particularly informative.
After reviewing many of these advertisements, I have a few questions in-
volving overall advertising costs and advertising terminology. Accordingly, I
would appreciate your sending me the following specific information about your
company's advertising efforts:
(a) How much money did your company spend on all advertising in 1973?
(1) Please break this down into product/service, goodwill (i.e., institutional),
political (i.e., non-deductible as a business expense under IRS Regulation
1.162-20(c) (4)) advertising.
(2) Please break this down for each medium (i.e., television, radio, newspapers,
magazines, pamphlets and brochures, other).
(b) What does the company consider to be public service advertising?
(1) Is such advertising to goodwifi (i.e., i~nstitutional) advertising, thus ew-
eluding product/service and political advertising?
(2) How does the company consider each of the advertisements attached to
this letter-as product/service, goodwill (i.e., institutional) or political (i.e.,
non-deductible) advertising?
Would you please reply to this letter as soon as possible, but not later than
February 6th. If you have any questions, please don't hesitate to let me know
or contact Len Bickwit at (202) 225-9351.
Sincerely yours,
PHILIP A. HART,
Ohairman,
subcommittee on the Environment.
EXHIBIT B
On~ COMPANY ADs SENT TO COMPANIES FOR COMMENTS
OIL COMPANIES OF AMERICA (API)
1. "How Can America Head Off Energy Shortages?" (Advocates offshore drill-
ing and deregulation of natural gas.)
2. "Can America Have Enough Energy . . ." (Alaska pipeline, increased use
of coal and nuclear power, have not been implemented because of economic and
environmental considerations; the U.S. must take a more realistic approach to
environmental problems.)
ATL~&NTIC RICHFIELD COMPANY
1. "What Stands Between Our Nation's Energy Shortage . . ." (Advocates
building of trans-Alaska pipeline.)
2. "Construction of the trans-Alaska pipeline . . ." (Advocates the building
of the pipeline which it states has been designed to meet tough environmental
standards.)
CONTINENTAL OIL COMPANY
1. "Because of embargoes on petroleum exports . . ." (Advocates conservation
of energy, rationing of scarce fuel, a sensible balance between environmental
and energy needs, auto-emission remain at present levels, increased strip min-
ing of coal, encourage trade relations for unrestricted trade in energy supplies.) .
PAGENO="0035"
69
EXXON
1. "Why energy is short in the U.S. .. ." (Price of natural gas is too low, coal
cannot be used because of Clean Air Requirements, nuclear power implementa-
tion is being delayed, government policies have discouraged building of
refineries.)
2. "Today, nuclear power supplies. . ." (Need nuclear power as soon as possi-
ble; it has been delayed, in part, by environmental objections.)
3. "Exxon plans to spend nearly $10 billion . . ." (Explains where company
will invest its capital and why it needs large profits.)
4. "Is North Slope Oil Really Worth the Risk?" (1971.) (Advocates construc-
tion of Alaska pipeline.)
5. "Here on the North Slope of Alaska . . ." (1971.) (Broadcast.) (Worth
the risk of capital to explore North Slope.)
6. "The Arctic wilderness is not always frozen . . ." (1971.) (Broadcast.)
(Tundra can be restored after construction of rigs and roads, and living quar-
ters in Alaska.)
7. "This is the Canadian Arctic near Alaska . . ." (1971.) (Broadcast.)
(Pipeline will be environmentally sound.)
GtJLF OIL CORPORATION
1. "Americans today are living in an atmosphere . . ." (Government regula-
tion caused the shortage; U.S. needs development of nuclear power and research
on nuclear fusion, development of fuels from oil shale and coal, geothermal, and
solar, balance of environment needs protection and energy demand.)
2. "We can't talk our way out of the energy crisis." (Calls for offshore drilling,
Alaskan pipeline, more refineries, deep water ports, increased use of coal, nuclear
power, synthetic fuels and environmental needs must be balanced with energy
needs, governmental support of long range research programs.)
3. "Ever Since the First Dawn . . ." (Broadcast.) (Nuclear power reactors
supply safe, clean energy.)
MOBIL
1. "Anyone who says the energy crisis . . ." (Composite of eight ads: "the
gap," "the unnatural gas shortage," "to have and have not," "energy policy
must be priority policy," "is anybody listening?" "so much to do, so little time,"
"Q: a gasoline shortage? A: yes, sad but true," "the unnatural gas shortage
revisited."
2. "An open letter on the gasoline shortage to :" (All statements that the
energy crisis are contrived are untrue. Political decisions have produced the
shortage. We must build the pipeline, open the continental shelf for drilling,
accelerate the construction of nuclear power plants.)
3. "Don't read these ads . . ." (Composite of four ads on profits.)
4. "Far out." (Advocates offshore exploration for oil and drilling.)
5. "Our Clean-seas policy is marine life insurance." (Advocates passage by
Congress of a bill amending the International Convention for Prevention of
the Pollution of the Sea by Oil.)
6. "So much to do, so little time." (It takes a great deal of money and time to
develop energy supplies; we have lost them due to environmental fears con-
cerning the Alaska pipeline and nuclear power.)
7. "We just spent three months' profits in one morning" (Money Mobil invests
for federal lease to explore Gulf of Mexico must come from profits.)
8. "Capital formation: the great multiplier" (Profits are needed for invest-
ment.)
9. "We're a big company . . ." (Profit is only 2 cents/gallon which is not so
much when you consider how much we invest and the risks we take.)
10. "The gap" (To close the energy gap if we drill offshore, build the pipeline,
produce synthetic fuels, build nuclear power plants, but environmentalists have
stalled these efforts.)
11. "Q: A gasoline shortage? A: Yes. Sad, but true." (Advocates control of
auto emissions in a way that won't waste gasoline, build Alaska pipeline, de-
regulate natural gas, explore offshore drilling.)
12. "The lady was listening" (Takes position that development of energy
resources can be coordinated with environmental goals if people strike a
balance in their environmental standards.)
PAGENO="0036"
70
13. "Are oil profits big? Right... (Need profits for capital investment.)
14. "Is Anybody Listening" (Oil companies warned the regulation of natural
gas, delay in construction of pipeline, environmental fears, and delay in off-
shore drilling would result in the energy crisis.)
15. "The $66 Billion Mistake . . ." (Grant a one-year extension for emission
control and substitute California standards.)
16. "Same-Dangerous curve ahead . . ." (Adopt California standards,
extend federal emission standards for one year and develop mass transit.)
17. "Same-Clean air and public transportation . . ." (Delay imposition of
federal emission control standards, substitute California standards, develop
public transportation system.)
18. "Same-The right question .. ." (Federal adoption of California emission
control standards.)
19. "Same-California has a better way . . ." (Grant one year extension of
federal emission control standards, adopt standards like Calif.; Congress should
enact federal mass transportation program.)
20. "The unnatural gas shortage. . ." (Calls for deregulation of natural gas
and miter continental shelf lease sales.)
21. "The unnatural gas shortage revisited. . ." (Advocates deregulation and
increased offshore exploration.)
22. "Energy is industrial plasma. . ." (Need energy for growth and to main-
tain standard of living, in order to produce energy we have to intensify offshore
drilling.)
23. "Because that's where the oil is . . ." (Advocates increased drilling off-
shore.) -
PHILLIPS PETROLEtIM
~L. "America's best kept secret.. ." (Advocates adoption by federal government
of Calif. emission standards.)
2. "Must this be the car of the future?" (People must change driving habits
to avoid shortages.)
8. "The Energy Gap" (Solution to energy gap is a unified national energy
policy including federal control by one adniinistrative unit; greater encourage-
ment of domestic exploration; balance between energy and environment.)
4. "The energy crisis is no longer a prediction . . ." (Federal regulation of
natural gas prices has discouraged discovery; environmentalists have slowed
down pipeline oil and lease sales; exploration of Atiantic ocean; auto emission
standards are too severe. Need to decontrol natural gas and balance environ-
mental and energy needs.)
SHELL
1. "Shell's preliminary earnings report. . ." (Explanation of why 1973 profits
are up.)
2. "How in all conscience. . ." (Defends high profits as necessary for capital
investment.)
TEXACO
1. "Texaco earned $1.3 billion in 1973 . . ." (Need increase in earnings for
investment.)
2. "We're not holding back anything. . ." (Says Texaco is supplying appro-
priate federal and state authorities with data and the company is not holding
back information.)
UTILITY ADS SENT TO COMPANIES ron COMMENT
EDISON ELECTRIC INSTITUTE
1. "Joseph Zagorski. . ." (Says nuclear power plants are safe.)
2. "A 10-story air cleaner . . ." (Says electricity needed to clean up environ-
ment, advocates building new generating facilities.)
3. "Why does my electric.. ." (Advocates increased rates.)
4. "What's being done by the . . ." (Says more electric power plants should
be built as soon as possible, discusses "better ways" to produce electricity.)
~. "Ann's job wouldn't exist without. . ." (Advocates increased rates. )`
~. "Liquid. . . gas. . . or solid.. ." (Advocates increased rates.)'
~t. Why shouldn't I be concerned . . ." (Says nuclear power plants are safe,
and advocates speed-up in development and construction of nuclear power plants.)
PAGENO="0037"
71
8. "Show and tell at the nuclear power. . ." (Says nuclear power plants are
safe and advocates increased construction of nuclear power plants.)
9. "Mom's apple pie is radioactive." (Says nuclear power plants are safe,
advocates increased construction of nuclear power plants.)
MIDDLE SOUTH UTILITIES SYSTEM
1. "America is Strong-Enough electric energy for the. . ." (Discusses benefits
of expanded utilities system in Alabama to be completed 1975.)
2. "America is Strong-Rationing of electric energy . . ." (Discusses what the
system is doing "to prevent rationing of electric energy.")
THE SOUTHERN COMPANY
1. "Water Cooler. (Discusses company's environmental protection facilities.)
2. "Power Playground". (Electric generating plants provide recreation lakes.)
3. "A Fish Story." (Says use of cooling lakes by electric generating plants
provides fine environment for fish.)
4. "Misconception . . ." (Promotes electricity consumption in off-peak winter
months.)
5. "A Pound of Beef . .
v~~co
1. "The Energy Crunch: Energy Insurance . . ." (Conservation tips.)
2. "The Energy Crisis: VEPCO has invested.. ." (Supports research and de-
velopment of alternative energy sources, advocates "economic nuclear energy.")
COMMONWEALTH EDISON
1. "Looking for a great fishing hole . . ." (Says electric generating stations
attract fish and are good recreation areas.)
2. "Conservation Department" (Advocates nuclear energy.)
3. "Anti-Pollution Device" (Says nuclear energy is safe and non-polluting.)
CONSOLIDATED EDISON
1. "Report to the People of NYC . . ." (Advocates increased rates, off-shore
drilling.)
2. "More Power to the People . . ." (Says new Con Ed hydroelectric plant in
New York will supply nedeed energy while protecting environment.)
GEORGIA POWER COMPANY
1. "Two reasons for an electric rate increase . . ." (Advocates electric rate
increase.)
2. "This is a new day for Joe . . ." (Broadcast.) (Advocates increase in price
of electricity.)
3. "You've probably heard that . . ." (Broadcast.)
FLORIDA POWER & LIGHT
1. "Straight talk from FPL about a rate increase . . ." (From booklet.) (Ad-
vocates rate increase.) [Not considered as an operating expense under Federal
Power Regulations.]
AMERICA'S RURAL ELECTRIC SYSTEMS
1. "We repeat: In solving America's energy crisis . . ." (Advocates R&D of
alternative energy sources, and national policy on energy and resources.)
AMERICAN ELECTRIC POWER SYSTEM
1. "Mr. President, We Agree . . ." (Advocates (1) modifying emission con-
trols; (2) leasing public land in the west for coal mining; (3) speed-up of nu-
clear power plants; (4) prohibiting the conversion of power plants from coal to
oil (Energy Emergency Act § 106).)
AMERICAN GAS ASSOCIATION
1. "The Alaskan pipeline . . ." (Advocates Alaskan pipeline.)
2. "Discover More Gas For America . . ." (Conservation tips.)
PAGENO="0038"
72
3. "The energy shortage. . ." (Advocates offshore drilling, R&D, deregu-
lation of natural gas and rate increases.)
4. "A gas well 5 miles deep-. . ." (Advocates higher prices for natural gas.)
BROOKLYN UNION GAS, LONG ISLAND LIGHTING CO., NEW YORK STATE ELEC. & GAS
CORP., IRIQUOIS GAS CORP., ROCHESTER GAS & ELEC. CORP.
"Energy From the Sea . . ." (Advocates offshore drilling.)
MISCELLANEOUS INDUSTRY SENT TO COMPANIES FOR COMMENT
GENERAL ELECTRIC
1. "An attempt to bring the . . . " (Advocates nuclear power and discus~ion of
alternative energy sources.)
2. "Facts that explain . . ." (Advocates and "explains" higher electric rates.)
3. "Zero growth in the electric industry . . ." (Argues that growth in elec-
tric industry will raise standard of living and solve pollution problems.)
4. "At a time like this, . . ." (Argues that fluorescent lamps can save energy
since they also have effect of heating buildings.)
5. "American Electric Power orders . . ." (Discusses new technology for
transmission of electricity.)
6. "The energy crisis you've been hearing . . ." (Advocates goal justifica-
tion and nuclear power plants, particularly foot breeder reactors.)
7. "The technology that gave you . . ." (Discusses GE's solid state equip-
ment used in electricity transmission lines.)
8. "Less than 1% of the world's water . . ." (Discusses use of GE equipment
and technology in fighting water pollution.)
9. "In ten years, . . ." (Advocates GE-designed nuclear power plants and gas
turbines to produce electricity.)
BETHLEHEM STEEL
1. "What some people are doing. . ." (Discusses use of steel for construction
of nuclear breeder reactors and generating plants.)
2. "We have only one proven . . ." (Discusses proposed legislation on sur-
face mining and says, "if unrea~onab1e restrictions on surface mining are en-
acted . . coal users and steel users would be hurt.)
UNIVERSAL OIL PRODUCTS
1. "Let's clear the air . . ." (Discusses benefits of catalysts and properly de-
signed catalytic converters in reducing harmful automotive emi~sions.)
GENERAL ATOMIC
1. "Introducing the new energy company . . ." (Advocates nuclear energy
and discusses nuclear reactors.)
GENERAL MOTORS
1. "The people who assemble GM . . ." (Discusses ways GM is trying to im-
prove conditions of employee~.)
2. "Let's respond to the energy question . . ." (Advocates as a national policy:
(1) deregulation of wellhead prices of natural gas, (2) immediate increase in
crude oil importation, (3) construction of pipelines, super tankers, dry water
ports, offshore terminals, (4) greater off-shore drilling, (5) rapid developing
and di~scussing of nuclear power plans, and (6) stepped-up R&D in alternative
sources of energy.)
PAGENO="0039"
73
EXHIBIT Ci
CHARTS OF CORPORATE RESPONSES
MAJOR OIL COMPANY ADVERTISING, 1973 (AS CHARACTERIZED BY COMPANIES RESPONDING TO SENATOR HART'S
INQUIRY)
Total
Company name expenditure
Deductible a
dvertising expenditures
-
Non.
deduct-
ible
Product!
service
Goodwill!
institutional
Miscel-
laneous
Atlantic Richfield $9, 739, 357 $3, 386, 142 $6, 353, 215
Exxon 25, 064, 936 1 12, 532, 936 112, 532,000
Gulf (estimates) (15, 000, 000) (7, 500, 000) (7, 500, 000)
Mobil 16, 158, 000 9, 047, 000 6, 282, 000 $829, 000
Phillips 28, 864, 474 4, 855, 469 3, 999, 005
Shell 22, 389, 000 11, 349, 000 3, 962, 000 3 $7, 078, 000
Texaco 27, 131, 000 9, 582, 000 17, 549, 000
Industry trade association: API 1,610,000 1,610,000
1 Approximately.
$ Phillips' aggregate expenditure was listed by that company as being $10,000 higher than the sum of its individual
parts.
3 Production costs.
UTILITIES ADVERTISING, 1973 (AS CHARACTERIZED BY COMPANIES RESPONDING
TO SENATOR HART'S INQUIRY)
Deductible
Total -________________________________
advertising Product! Goodwill! Miscel- Non-
Company name expenditure service institutional laneous deductible
American Electric Power Co $1, 411, 689 $235, 000 $983, 000 $194, 000
Brooklyn Union Gas Co 81, 400 81, 400
Columbia Gas of New York 31, 308 11, 940 19, 058 310
Commonwealth Edison 2, 639, 783 275, 373 2, 364, 410
Con Ed 1, 195, 000 1, 195, 000
Fonda Plower & Light 869,946 869,946 (1)
Georgia Power Co 1, 410, 069 352, 802 814, 512 242, 755
Long Island Lighting Co 774, 000 380, 000 394, 000
Middile So. Utilities, Inc 453, 715 453, 715
National Rural Electric Coop. Association 229, 670 229, 670
New York State Electric & Gas Co 546, 674 77, 914 240, 751 228, 009
Rochester Gas & Electric 401, 480 27, 000 374, 000
Southern Co 591, 399 591, 399
Vepco 563, 402 164, 366 399, 036
Industry Trade Association: American Gas As-
sociation 6, 374, 000 2, 834, 000 3, 540, 000
MISCELLANEOIS INDUSTRY ADVERTISING, 1973 (AS CHARACTERIZED BY
COMPANIES RESPONDING TO SENATOR HART'S INQUIRY)
Allegheny Airlines $4, 253, 284 $4, 092, 284 $161, 000
Beech Aircraft 1, 785, 795 1, 785, 795 9 2 60, 000
Bethieham Steel (3) (4) (5)
General Atoniic__._ 230,000 230,066
General Motors 243, 000, 000 e 238, 140, 000 0 4, 860, 000
General Electric (~)
United Airlines 28, 070, 000 28, 070, 000
1 FPL did not deduct the "ad" sent, they considered it a below-the-line deduction.
2_Included in fiscal year 1974 accounting.
1_Not provided.
Two-thirds of advertising expenditures.
5 One-third of advertising expenditures.
Estimate.
PAGENO="0040"
74
EXHIBIT D
ALASKA PIPELINE
S. 2726. To reform the mineral leasing laws, (October 20, 1971.)
S. 970. To deal with the current energy crisis and the serious shortages of
petroleum products facing the Nation and to authorize construction of the trans-
Alaska pipeline. (February 21, 1973.)
H.R. 8774. To deal with the current energy crisis and the serious shortages of
petroleum products facing the Nation and to authorize construction of the trans-
Alaska pipeline. (June 18, 1973.)
H.R. 8108. To deal with the current energy crisis and the serious shortages of
petroleum products facing the Nation and to authorize construction of the trans-
Alaska pipeline. (May 23, 1973.)
H.R. 6756. To deal with the current energy crisis and the serious shortages of
petroleum products facing the Nation and to authorize construction of the trans-
Alaska pipeline. (April 9, 1973.)
H.R. 9073. To deal with the current energy crisis and the serious shortages of
petroleum products facing the Nation and to authorize construction of the trans-
Alaska pipeline. (June 29, 1973.)
P.L. 93-453. To amend section 28 of the Mineral Leasing Act of 1920, and to
authorize a trans-Alaska oil pipeline, and for other purposes. (November 16,
1973.)
COAL GASIFICATION AND LIQUEFACTION
H.R. 220. To create a corporation for profit to develop commercially feasible
processes for the conversion of coal to crude oil and other liquid and gaseous
hydrocarbons, and for other purposes. (January 3, 1973.)
H.R. 9694. To further energy research and development by establishing a Coal
Liquefaction Corporation; to amend the National Science Foundation Act of
1950 and to authorize and direct the National Science Foundation to fund basic
and applied research related to energy and thereby support the objectives of the
Coal Liquefaction Corporation; and for other purposes. (July 30, 1973.)
H.R. 9691. To further energy research and development by establishing a Coal
Gasification Development Corporation; to amend the National Science Founda-
tion Act of 1950 and to authorize and direct the National Science Foundation to
fund basic and applied research related to energy and thereby support the objec-
tives of the Coal Gasification Development Corporation; and for other purposes.
(July 30, 1973.)
COAL-INCREASED USE AS AN ENERGY SOURCE
H.R. 12045. TO increase the production, transportation, and conversion of coal
as a source of energy. (December 19, 1973.)
H.R. 12121. To increase the production, transportation, and conversion of coal
as a source of energy. (December 19, 1973.)
CONSERVATION OF ENERGY
H.R. 11714. To provide for the development of improved design, lighting insula-
tion, and architectural standards to promote efficient energy use in residential,
commercial, and industrial buildings. (November 30, 1973. Reported with amend-
ment, committed to Committee of Whole House on State of the Union, and order
to be printed. December 14, 1973.)
DEREGULATION OF NATURAL GAS
H.R. 2866. To provide for the deregulation of natural gas. (January 24, 1973.)
S. 1549. To amend the Natural Gas Act to provide that provisions of the Act
shall not apply to certain sales in interstate commerce. (April 12, 1973.)
5. 992. To amend the Natural Gas Act in order to expand the jurisdiction of
the Federal Power Commission under such Act. (February 26, 1973.)
5. 2305. To amend the Natural Gas Act to extend its application to the direct
sale of natural gas in interstate commerce, and to provide that provisions of the
Act shall not apply to certain sales in interstate commerce. (August 1, 1973.)
PAGENO="0041"
75
ELECTRIC POWER-INCREASED EFFICIENCY
HR. 5650. To promote commerce and amend the Federal Power Act to es-
tablish a Federal power research and development program to increase effi-
ciencies of electric energy production and utilization, reduce environmental ha-
pacts, develop new sources of clean energy, and for other purposes. (March 14,
1973.)
H.R. 4997. To promote commerce and amend the Federal Power Act to es-
tablish a Federal power research and development program to increase effi~
ciencies of electric energy production and utilization, reduce environmental im-
pacts, develop new sources of clean energy, and for other purposes. (Feb-
ruary 28, 1973.)
EMISSION CONTROLS-VEHICLES, SMOKESTACKS
H.R. 9210. To provide information for more effectively dealing with national
energy problems by directing the National Science Foundation to conduct a
study of emission control equipment and techniques applicable to the smoke-
stacks of coal-burning powerplants and offer recommendations for their im-
provement. (July 11, 1973.)
H.R. 1773. To amend the National Emissions Standards Act in order to
conserve fuel. (December 4, 1973.)
IT.R. 11930. To amend the National Emissions Standards Act in order to
conserve fuel. (December 12, 1973.)
H.R. 11950. To amend the National Emissions Standards Act in order to
conserve fuel. (December 13, 1973.)
EI.R. 12062. To suspend motor vehicle emissions and fuel standards for the
duration of the energy crisis in order to conserve fuel. (December 20, 1973.)
ENERGY EMERGENCY ACT-VETOED
H.R. 12132. To amend the Economic Stabilization Act of 1970 to eliminate
price controls of petroleum and petroleum products. (December 21, 1973.)
5. 2589. To declare by congressional action a nationwide energy emer-
gency; to authorize the President to immediately undertake specific actions to
conserve scarce fuels and increase supply; to invite the development of local,
State, National, and international contingency plans; to assure the continua-
tion of vital public services; and for other purposes. (December 17, 1973.)
TABLE OF CONTENTS
TITLE I~ ENERGY EMERGENCY AUTHORITIES
Sec. 101. Purpose.
Sec. 102. Definitions.
Sec. 103. Amendments to the Emergency Petroleum Allocation Act of 1973.
Sec. 104. Federal Energy Administration.
Sec. 105. Energy conservation.
Sec. 106. Coal conversion and allocation.
Sec. 107. Regulated carriers.
Sec. 108. Delegation of authority.
Sec. 109. Administration.
Sec. 110. Prohibited acts.
Sec. 111. Enforcement.
Sec. 112. Grants to States.
Sec. 113. Fair marketing of petroleum products.
Sec. 114. Voluntary energy conservation agreements.
Sec. 115. Prohibitions on unreasonable allocation regulations.
Sec. 116. Use of carpools.
Sec. 117. Prohibition on price gouging.
Sec. 118. Importation of liquified natural gas.
Sec. 119. Development of additional electric power resources.
Sec. 120. Antitrust provisions.
Sec. 121. Comprehensive review of export and foreign investment policies.
PAGENO="0042"
76
Sec. 122. Employment impact and worker assistance.
Sec. 123. Exports.
Sec. 124. Prohibition of peroleum exports for military operations in Indochina.
Sec. 125. Report and termination date.
Sec. 126. Reports on national energy sources.
Sec. 127. Development of processes for the conversion of coal to crude oil and
other liquid and gaseous hydrocarbons.
TITLE II: COORDINATION WITH ENVIRONMENTAL PROTECTION REQUIREMENTS
Sec. 201. Suspension authority.
Sec. 202. Implementation plan revisions.
Sec. 203. Motor vehicle emissions.
Sec. 204. Conforming amendments.
Sec. 205. Protection of public health and environment.
Sec. 206. Energy conservation study.
Sec. 207. Reports.
Sec. 208. Recommendations for siting of energy facilities.
Sec. 209. Fuel economy study.
Sec. 210. Fuel allocations.
GEOTHERMAL-RESEARCH AND DEVELOPMENT
ILR. 4413. To promote the exploration and development of geothermal re-
sources through cooperation between the Federal Government and private enter-
prise. (February 20, 1973.)
HR. 4963. To promote the exploration and development of geothermal re-
sources through cooperation between the Federal Government and private enter-
prise. (February 28, 1973.)
H.R. 8628. To further ellergy research and development by establishing a Geo-
thermal Energy Development Corporation; to amend the National Science Foun-
dation Act of 1950; and to authorize and direct the National Science Foundation
to fund basic and applied research related to energy and thereby support the
objectives of the Geothermal Energy Development Corporation; and for other
purposes. (June 13, 1973.)
H.R. 9658. To further energy research and development by establishing a Geo-
thermal Energy Development Corporation; to amend the National Science Foun-
dation Act of 1950; and to authorize and direct the National Science Foundation
to fund basic and applied research related to energy and thereby support the
objectives of the Geothermal Energy Development Corporation; and for other
purposes. (July 30, 1973.)
HR. 11212. To further the conduct of research, development, and commercial
demonstration in geothermal energy technologies, to direct the National Science
Foundation to fund basic and applied research relating to geothermal energy,
and to direct the National Aeronautics and Space Administration to carry out a
program of demonstrations in technologies for commercial utilization of geother-
mal resources including hot dry rock and geopressured fields. (October 31, 1973.)
LIQUEFIED NATURAL GAS-IMPORTATION
]ELR. 4430. To suspend the importation of liquefied natural gas ~nd the con-
struction of new storage facilities for such gas until such time as a thorough
evaluation of the hazards associated with the marine transportation and the
delivery and storage of such gas is made and other actions are taken to prevent
or minimize such hazards. (February 20, 1973.)
H.R. 5755. To suspend the importation of liquefied natural gas and the con-
struction of new storage facilities for such gas until such time as a thorough
evaluation of the hazards associated with the marine transportation and the
delivery and storage of such gas is made and other actions are taken to prevent
or minimize such hazards. (March 15, 1973.)
NUCLEAR POWER 1972, 1973, 1974
H.R. 13731. To amend the Atomic Energy Act of 1954, as amended, to require
applicants for licenses to construct and operate utilization or production facili-
ties to obtain a construction permit from the Atomic Energy Commission prior
to commencement of construction, and for other purposes. (March 9, 1972.)
PAGENO="0043"
77
H.R. 13732. To amend the Atomic Energy Act of 1954, as amended, to author-
ize the Commission to issue temporary operating authorizations for production
and utilization facilities under certain circumstances, and for other purposes.
(March 9, 1972.)
H.R. 12823. To amend the Atomic Energy Act of 1954 to provide for improved
procedures for planning and environmental review of proposed nuclear power-
plants, and for other purposes. (February 14, 1974.)
H.R. 11957. To amend the Atomic Energy Act of 1954, *as amended, to re-
structure the hearing process with respect to licenses to construct or operate
utilization or production facilities. (December 13, 1973.)
H.R. 13484. To amend the Atomic Energy Act of 1954, as amended to provide
for approval of sites for production and utilization facilities, and for other pur-
poses. (March 13, 1974.)
HR. 11696. To amend the Atomic Energy Act of 1954 with respect to the grant-
ing of awards for inventions or discoveries contributing to the development, use,
or control of atomic energy. (November 30, 1973.)
H.R. 8867. (Report No. 93-385) To amend the EURATOM Cooperation Act of
1958, as amended. (June 30, 1973. Committed to Committee of Whole House on
State of the Union and ordered to be printed. July 19, 1973.)
H.R. 8662. (Report No. 93-280) To authorize appropriations to the Atomic
Energy Commission in accordance with section 261 of the Atomic Energy Act of
1954, as amended, and for other purposes. (June 13, 1973. Committed and
ordered to be printed. June 14, 1973.)
S. 2724. To establish a Federal Radiation Protection Agency, to transfer certain
functions of the Atomic Energy Commission and other departments and agencies
to such Agency, and for other purposes. (November 19, 1973.)
S. 1994. (Report No. 93-224) To authorize appropriations to the Atomic Energy
Commission in accordance with section 261 of the Atomic Energy Act of 1954, as
amended, and for other purposes. (June 13, 1973. Reported without amendment.
June 18, 1973.)
P.L. 93-158. To amend Public Law 93-60 to increase the authorization for
appropriations tO the Atomic Energy Commission in accordance with section 261
of the Atomic Energy Act of 1954, as amended, and for other purposes. (Novem-
ber 26, 1973.)
OIL IMPORT CONTROL PROGRAM
H.R. 4193. To terminate the oil import control program (February 8, 1973.)
H.R. 2674. Relative to the oil import program. (January 23, 1973.)
H.R. 2311. Relative to the oil import program. (January 18, 1973.)
H.R. 429. To terminate the oil import control program. (January 3, 1973.)
H.R. 2732. To terminate the oil import control program. (January 23, 1973.)
H.R. 2818. To terminate the oil import control program. (January 24, 1973.)
H.R. 428. To terminate the oil import control program. (January 3, 1973.)
H.R. 430. To terminate the oil import control program. (January 3, 1973.)
S. 1019. To terminate the oil import control program. (February 27, 1973.)
OFFSHORE DRILLING AND PORTS
S. 2339. To establish the Santa Barbara Channel Federal Energy Reserve.
(August 3, 1973.)
H.R. 2288. To amend the Fish and Wildlife Coordination Act to require certain
permits for exploring or mining oil and gas underlying the navigable waters of
the United States. (January 18, 1973.)
JLR. 11951. To authorize the construction and operation of high seas oil ports,
to be located in the offshore coastal waters of the United States, in order to
facilitate the importation of petroleum and petroleum products into the United
States, and for other purposes. (December 13, 1973.)
H.R. 10701. To amend the Act of October 27, 1965, relating to public works on
rivers and harbors to provide for construction and operation of certain port
facilities. (October 3. 1973.)
RESEARCH AND DEVELOPMENT OF ALTERNATIVE FUEL SOURCES
H.R. 10640. To establish a national program for research, development, and
demonstration in fuels and energy and for the coordination and financial supple-
mentation of Federal energy research and development; to establish development
corporations to demonstrate technologies for shale oil development, coal gasifica-
PAGENO="0044"
78
tion development, advanced power cycle development, geothermal steam develop-
ment, and coal liquefaction development; to authorize and direct the Secretary
of the Interior to make mineral resources of the public lands available for said
development corporations; and for other purposes. (October 2, 1973.)
H.R. 12027. To establish a National Energy Development Bank to provide loans
and grants to finance urgently needed research, exploration, development, produc-
tion, and delivery of energy resources within the United `States. (December 19,
1973.)
cH.R. 8404. To establish a national program for research, development, and
demonstration in fuels and energy and for the coordination and financial supple-
mentation of Federal energy research and development; to establish development
corporations to demonstrate technologies for shale oil `development, coal gasifica-
tion development, advanced power cycle development, geothermal steam develop-
ment, and coal liquefaction development; to authorize and direct the Secretary
of the Interior to make mineral resources of the public lands available for said
development corporations; and for other purposes. (June 5, 1973.)
S. 1283. To establish a national program for research, development, and dem-
onstration in fuels and energy and for the coordination and financial supplemen-
tation of Federal energy research and development; and for other purposes.
(December 7, 1973.)
`S. 2636. To authorize supplemeutal appropriations for National Science Foun-
dation Energy research and development. (October 30, 1973.)
REsoLUTIoNs-SEI~cT C0MMIrrEE ON ENERGY RESOURCES
INTERNATIONAL ORGANIZATION OF OIL IMPORTING COUNTRIES
CII. Res. 194. Creating a select committee of the House to conduct a full and coni.
plete investigation of all aspects of the energy resources of the United States.
(Feb. 6, 1973.)
II. Res. 80. `Creating a select committee of the House to conduct a full and com-
plete investigation of all aspects of the energy resources of the United States.
(Jan. 3, 1973.)
`H. Res. 44. To authorize a study of national fuels and energy policy. (Janu-
ary 3, 1973.)
`H. Res. 127. Creating a select committee of the House to conduct a full and com-
plete investigation of all aspects of the energy resources of the United States.
(Jan. 11, 1973.)
~EE. Res. 403. Requesting the President to enter into negotiations with major oil
importing countries to establish an international organization of oil importing
countries and to establish common practices and policies affecting oil pricing,
importation, and consumption. (May 21,1973.)
H. Res. 533. Requesting the President to enter into negotiations with major oil
importing countries to establish an international organization of oil importing
countries and to establish common practices and policies affecting oil pricing,
importation, and consumption. (September 5, 1973.)
SHALE OIL
ILR. 9693. To further energy research and development by establishing a Shale
Oil Development Corporation; to amend the National Science Foundation Act of
1950 and to authorize and direct the National Science Foundation to fund basic
and applied research related to energy and thereby support the objectives of the
Shale Oil Development Corporation; and for other purposes. (July 30, 1973.)
SOLAR HEATING AND ENERGY
H.R. 9696. To establish an Office of Solar Energy Research in the Department
of the Interior, and for other purposes. (July 30, 1973.)
H.R. 11027. To provide for the early commercial demonstration of the tech-
nology of solar heating by the National Aeronautics and Space Administration
in cooperation with the National Bureau of Standards, the National Science
Foundation, the Secretary of Housing and Urban Development, and other Fed-
eral agencies, and for the early development and commercial demonstration of
technology for combined solar heating and cooling. (October 18, 1973.)
PAGENO="0045"
79
STRUCTURE OF OIL INDUSTRY
H.R. .9266. To amend the Securities and Exchange Commission Act of 1933
to authorize the Securities and Exchange Commission to regulate the structure
of certain corporations and other firms engaged in petroleum refining. (July 12,
1973.)
SURFACE AND STRIP MINING
H.R. 181. To provide for the restoration of all lands located in the United
States upon which strip mining operations are being or have been carried out,
and for other purposes. (January 3, 1973.)
H.R. 2380. To provide for the regulation of strip coal mining, for the conserva-
tion, acquisition, and reclamation of strip coal mining areas, and for other pur-
poses. (January 18, 1973.)
H.R. 12898. To provide for the regulation of surface coal mining operations,
to authorize the Secretary of the Interior to make grants to States to encourage
the State regulation of surface coal mining, and for other purposes. (February 20,
1974.)
EXHIBITS Eh-1 THROUGH E-41
F.P.O. SUBACCOUNT 426.4 FORMS FROM SELECTED UTILITIES OF THE SOUTHERN
SYSTEM
Senator HART. The committee welcomes our next witness, Mr. Les-
ter Fant, a partner in Cohen & Tlretz, a tax law firm, and tax specialist.
Mr. Fant, if you were here earlier, I have already identified myself
as an illiterate when it comes to the Internal Revenue Code. If I don't
respond very promptly to your testimony, it will simply be that I
never tried to fight the battle of understanding.
STATEMENT OP LESTER G. PANT III, ATTORNEY, COHEN & TJRETZ,
WASHINGTON, D.C.
Mr. FANT. Mr. Chairman, I think that is a very modest disclaimer
for you to make, and I am certain matters we are dealing with are
completely within your comprehension, so I have no reservations
caused by your disclaimer.
Senator HART. All right, try me.
Mr. FANT. Mr. Chairman, since you have already identified me, I
will not further identify myself for the record.
I was asked by the subcommittee to make a study of section 162(e)
of the Internal Revenue Code and the Treasury regulations issued
thereunder, and to arrive at a judgment as to the application of these
provisions to certain advertisements which have been introduced into
the record as exhibits 1 through 99.
I am grateful to the subcommittee for this opportunity to express
my views. I believe that this matter has implications far beyond the
tax provision which I will discuss and the dollars involved, even
though the dollars involved could be quite substantial. I believe the
subject of these hearings has a direct bearing on the health of our
domestic society.
There was a time when influence of each man's voice on affairs of
state was determined by the rightness of what he said, and the persua-
siveness with which he spoke. It was against this background that the
1 Were not reproducible and are In the committee files.
PAGENO="0046"
80
first amendment to the Constitution of the United States was adopted,
guaranteeing each man the freedom to express his views on political,
social, and religious questions.
In this age of modern communications, however, a man's influence
upon affairs of state is determined not only by the rightness of what
he says, and the persuasiveness with which he says it, but also by the
amount of money which he is able and willing to spend in order to
advance his views.
The preparation and publication of advertisements, and other uses
of communications media, are extremely expensive. And yet, a skill-
ful media campaign is one of the most effective means of influencing
the affairs of state. The well-financed supporter of a particular idea
can make a more effective presentation, and can reach a greater audi-
ence, than an individual of average means who might oppose that idea.
Many subjects of governmental concern have a direct and tangible
financial impact on business, whereas their impact on the lives of pri-
vate citizens is diffuse and intangible. For example, the recreational
and esthetic value of an unpolluted stream provides enjoyment to a
private citizen, but gives him with no funds with which to finance a
campaign to keep the stream clear.
The businessman, who can reduce his costs by dumping untreated
wastes into the stream, can use a part of his cost savings to engineer
governmental approval of the dumping.
Even governmental decisions which directly affect the finances of
private citizens do not generate effective opposition to business pub-
licity and advertising campaigns. For example, a change in the regu-
lation of basic commodities, or the price support levels for agricultural
products, might cost 20 million Americans an additional $10 per year,
which is less than 3 cents per person per day.
The same decision, however, generates an additional $200 million for
the producers and suppliers involved. Business might reasonably al-
locate 10 percent of this amount to a program of public relations and
direct lobbying with which to secure the desired decision.
If all business expenditures in such a campaign were deductible for
Federal income tax purposes, business would have, in the foregoing
example, $40 million to use to influence the American people and the
Federal Government. Of this $40 million, $20 million, or 10 percent
of the expected return from the decision in question, would come from
the treasury of business, and $20 million would come from the Federal
Treasury through a reduction in the taxes which business would other-
wise pay. With such ftmds available, business can virtually overwhelm
the will of the American people on any particular question.
Notwithstanding the imbalance of power between business interests
and private citizens, a substantive law prohibiting business from ex-
pressing its views on governmental questions would seem foreign to a
society dedicated to free speech.
I am not prepared to suggest a resolution to the tension between
the sound public policy favors equalizing the influence of private
citizens and businesses on affairs of government, and the constitutional
prohibition against limitations on free speech.
I do, however, suggest that this is a problem which affects the health
of our democratic institutions, and that it is a problem which merits
further consideration.
PAGENO="0047"
81
Short of a direct prohibition on expenditures by businesses for ad-
vertising, there are measures which can reduce the imbalance of power
I have described. In the example I gave, `business spent $40 million
on advertising campaigns, of which $20 million came from treasury
of business, and $20 million came from the Federal Treasury as a
result of tax deductions to business resulting from claimning a $40
million deduction for the amount expended.
Historically, in fact, the expenditures outlined above have been
nondeductible for Federal income tax purposes, and consequently,
none of the expenditures should come from the Federal Treasury.
In the hypothetical discussed above, this means that if business is
only `willing to spend $20 million out of pocket, then it could only con-
duct a campaign which cost $20 million.
Under section 162(e) of the Internal Revenue Code, expenditures
for grassroots lobbying are nondeductible.
I would like~first to put section 162(e) into the general context of the
tax system, and to briefly review its history.
Under the Internal Revenue Code, Federal income tax is com-
puted by first determining the amount of all income from whatever
source derived, received by a taxpaying entity, such as an individual
or a corporation. From this gross income, deductions specifically enu-
merated by Congress are allowed for the purpose of arriving at taxable
income. The tax rate is then applied aganist taxable income, and the
amount of tax produced is paid.
It has often been stated by the courts that deductions are a matter
of "legislative grace," and that taxpayers have no inherent claim to
deduct from their gross income any amount not specifically allowed
by Congress. -
Many of the deductions allowed under the Internal Revenue Code
are permitted for the purpose of computing an amount roughly equiva-
lent to a taxpayer's net income, or net profit. Additional deductions,
such as charitable deduction, the rapid amortization of pollution con-
trol facilities, and medical deductions, are permitted by the Internal
Revenue Code as an expression of a wide variety of public policies.
Section 162 of the code permits, generally, a deduction from income
for all the ordinary and necessary expenses paid or incurred during
the taxable year on carrying on any trade or business.
The general purpose of this section is to permit taxpayers to deduct
all amounts, whatever they might be, which are spent in earning
income, so that the tax will only be applied to the taxpayer's net
income.
Some expenditures which are made in earning income, however, are
specifically made nondeductible under section 162 of the Code. In
these instances a taxpayer's taxable income might exceed its net
income, or net profit from business.
One example of an expenditure which is paid in connection with
a taxpayer's business, but which is nondeductible for income tax pur-
poses is an expenditure for what is generally referred to as grassroots
lobbying. Section 162(e), which disallows deductions for grassroots
lobbying is not in the Internal Revenue Code for the purpose of
determining the taxpayer's net income. Instead, the purpose of section
162(e) is to reduce the disparity between the ability of businesses and
private citizens to engage in grassroots lobbying.
PAGENO="0048"
82
Before analyzing section 162(e) in detail, however, I would like to
point out the requirements that must be met before section 162 (e)
becomes even relevant.
In the first place, an advertisement, to be deductible at all under
section 162, must be ordinary and necessary business expense.
An example of an advertisement which is not an expense would be
an advertisement which is part of a capital expenditure.
For example, if a business published an advertisement urging that
a county board of supervisors grant a necessary permit for the con-
struction of a business facility, the cost of that ad might be considered
a part of the cost of the facility when it was constructed.
Under these circumstances, the business would not be entitled to a
current deduction for the expenditure, but would be required to cap-
italize the cost of the ad, along with the other costs of the facility and
write them off over the useful life of the facility.
The courts have held that the terms "ordinary" and "necessary" re-
quire that an expenditure be "appropriate and helpful." An example
of an advertisement which would not be appropriate and helpful
would be one which did not bear the business name, or which promoted
solely the personal interest of the shareholder of the corporation, or
any taxpayer other than the taxpayer claiming a deduction for the
cost of the ad.
Treasury regulations hold that, in general, goodwill and institu-
tional advertising, even though it does not directly promote the sales
of a business product, is to be considered an ordinary and necessary
business expense. Treasury regulations section 1.162-20 (a) (2) pro-
vides that institutional or goodwill advertising which keeps the tax-
payers' name before the public is generally deductible as an ordinary
and necessary business expense, provided the expenditures are related
to patronage the taxpayer might reasonably expect in the future.
An example given in the regulations of goodwill advertising as ad-
vertising which keeps the taxpayer's name before the public in con-
nection with encouraging contributions to the Red Cross, or the pur-
chase of U.S. savings bonds.
In addition, the regulations specifically permit deductions for ex-
penditures for advertising which presents views on economic, financial,
social, or other questions of general nature, provided such advertising
does not involve the type of "grassroots" lobbying which is prohibited
under section 162(e).
The regulations relating to goodwill and institutional advertising
had their genesis in wartime, when many corporations sold all their
products directly to the Government for the military effort, but sought
to publish institutional or goodwill advertising in order to keep their
corporate name before the public.
It is easy to conceive of expenses for grassroots lobbying that satisfy
the foregoing tests were it not for the specific prohibition in section
162 (e). An advertisement designed to influence private citizens and,
indirectly, legislators, to take some action which which would increase
a business profit, could easily be said to be an ordinary and necessary
business expense for that business. Such expenditures would not be
allowable as deductions, however, if they satisfied the tests for ap-
plication of section 162(e) which prohibits deductions for "grass-
roots" lobbying.
PAGENO="0049"
83
Before leaving the sections of the regulations related to institu-
tional advertising, I would like to point out that the general language
that permits deductions for the cost of presenting views on economic,
financial, or social questions does not override the prohibition against
deductions for grassroots lobbying. It cannot be argued that the costs
of advertisements in a lobbying campaign are deductible as goodwill
advertising the advertisement also fall within the definition of grass-
roots lobbying.
The regulations make clear that the denial of deductions for grass-
roots lobbying supersedes the allowance of deductions for institutional
and goodwill advertising.
I would like also to comment briefly upon the history of section
162(e). Regulations issued by the Commissioner of Internal Revenue
in 1918, without specific statutory authority, denied deductions for
expenditures for "lobbying purposes, the promotion or defeat of legis-
lation, the exploitation of propaganda * * ~ The Supreme Court, in
Textile Mill Securities üorp. v. Commissioner, which was decided in
1941, held that such regulations, as applied to direct lobbying efforts,
were valid interpretations of the statutory requirements that a business
expense be "ordinary and necessary" in order to be deductible.
In Camiimarano v. U.S., which was decided in 1959, the Supreme
Court again considered the validity of the regulations which denied
deductions for grassroots lobbying. In the Cammarano case, the court
considered the lobbying efforts of a wholesale beer distributor designed
to block enactment of an initiative which would give the State a mo-
nopoly on wholesale beer distribution and therefore terminate the tax-
payer's business activity.
This was a very clear case in which, from a strictly financial point
of view, the expenditures would qualify as ordinary and necessary, be-
cause, if the initiative were successful, it would be the end of the
taxpayer's business. The Supreme Court, however, held that the
amounts for grassroots lobbying spent were nondeductible.
The Supreme Court relied heavily on the regulations. The Court held
that since the regulations had been in effect for more than 40 years,
and since during that 40-year period the taxing statute had been re-
peatedly reenacted, the regulations had the force of law. The argument
generally was that Congress knew how the Commissioner was inter-
preting ordinary and necessary, and if Congress disapproved of this
interpretation, they would have changed the law in one of the re-
enactments of section 162.
In Cammarano the taxpayer further argued that if the regulation
was construed to deny the deduction, the regulation would amount to
a limitation upon freedom of speech which would be prohibited by
the First Amendment to the Constitution. The taxpayer cited various
early cases in which the Supreme Court had held that various types
of direct taxes upon the expression of views were unconstitutional.
In response to this argument, however, the Supreme Court held:
Petitioners [the taxpayers] are not being denied a tax deduction because they
engage in constitutionally protected activities, but are simply being required to
pay for those activities entirely out of their own pockets, as everyone else engag-
ing in similar activities is required to do under the provisions of the Internal
Revenue Code. Nondiscriminatory deniel of deductions from gross income to sums
expended to promote or defeat legislation is plainly not "aimed at the suppression
of dangerous ideas." Rather, it appears to us to express a determination by Con-
42-367-75----4
PAGENO="0050"
84
gress that since purchased publicity can influence the fate of legislation which will
affect, direct or indirectly, all in the community, everyone in the community
should stand on the same footing as regards its purchase so far aS the Treasury
of the United States is concerned.
Based upon this interpretation, the Supreme Court explicitly held
that the denial of deductions for grassroots lobbying was consistent
with the Constitution. The tax provisions we are considering do not
bear the same constitutional handicaps that a direct prohibition upon
business advertising might bear.
Shortly after the Supreme COurt's decision in Cammarano, the
Treasury Department issued new regulations which provided a greater
elaboration of the rules disallowing lobbying expenses, and further
provided for the pro rata disallowance of deductions for dues paid
to labor unions and trade associations and other organizations en-
gaged in lobbying. The Service, at the same time, began a more vigor-
ous program of enforcement of the regulations.
In the Revenue Act of 1962, however, Congress adopted section
162(e) which repudiated the regulation provisions denying deduc-
tions for "direct" lobbying, but adopted into the Code the regula-
tions denying deductions for "grassroots" lobbying. The provisions
which made these changes originated in the Ways and Means Com-
mittee, and were opposed by the administration.
Under section 162(e) (1), deductions are allowed for "direct" lobby-
ing, which is defined as direct appearances, submission of statements,
and sending of communications to committees or members of legisla-
tive bodies, with respect to legislation or proposed legislation of direct
interest to the taxpayer. Dues paid to membership organizations, such
as business leagues and labor unions, which are attributable to "direct"
lobbying, are likewise deductible. Under section 162(e) (2) (B), how-
ever, Congress drew a clear line between expenditures for direct lobby-
ing and expenditures for grassroots lobbying. Section 162(e) (2) (B)
states that no amount is deductible which is paid:
In connection with any attempt to influence the general public or segments
thereof with respect to legislative matters, elections, or referendums.
The report of the Senate Finance Committee on section 162(e) (1)
stated that it was felt that the deduction should be permitted for direct
lobbying, which, as I stated earlier, is defined as lobbying expenses
involved in direct contacts with members of the legislative bodies or
their committees with respect to legislation which has a direct influence
on the business of the taxpayer.
The reason advanced by the Senate Finance Committee was that
taxpayers could get deductions for communications with the excutive
branch of the Government, or litigation before the judicial branch.
Section 162(e) (1) equalizes the tax treatment of expenditure for
communications with the executive, legislative, and judicial branches.
provided they are also ordinary and necessary expenses.
The principal reason for supporting the prohibition of deductions
for grassroots lobbying is the desirability, which I discussed earlier,
of reducing the disparity between the ability of individual private
citizens, and business organizations, to influence the affairs of
Government.
The Supreme Court, as pointed out above, described this policy
as one of achieving "tax equilibrium." Since the private citizen gets
PAGENO="0051"
85
no deductions for expenditures made in opposition to water pollution,
equilibrium is achieved if business organizations, desiring to dump
untreated wastes in streams, likewise get no deductions for their pub.-
licity campaign designed to achieve that end.
The notion that "tax equilibrium" supports the denial of deductions
for grassroots lobbying has been criticized on the grounds that if
successful, the private citizen will receive recreational or esthetic
enjoyment, but will not have to pay taxes to the Government on these
nonfinancial gains. The rewards to business, however, are financial,
and the business will pay taxes to the Government if it realizes taxable
additional profits as a result of success in influencing the Government.
Under this analysis tax equilibrium is achieved by allowing the
deductions for grassroots lobbying and taxing the income realized
by the business if the lobbying is successful.
The foregoing argument ignores the fact that if private citizens
were to receive some financial return, such as a statutory bounty,
under the Refuse Act of 1899, this income would be taxable to the
private citizen, just as business' financial rewards are taxable.
In other words, the deductibility-the denial of the deduction for
these expenditures is across the board and treats private citizens
and businesses equally. Likewise, the rewards of such lobbying are
treated equally since both business and private citizens pay taxes if
they receive financial rewards from their lobbying efforts.
Furthermore, even if it is accepted that the denial of deductions
from grassroots lobbying is a deviation from strict tax neutrality, this
deviation, as a matter of policy, is appropriate. Since business will
receive financial rewards for its success in grassroots lobbying, it has
a ready fund for use against private citizens seeking to protect rec-
reational or esthetic interests.
In addition, the rewards to business of favorable governmental
action are often direct and measurable whereas the rewards to private
individuals are indirect and diffused. For these reasons business has
both the far greater motivation, and the far greater ability to conduct
effective grassroots lobbying efforts in order to influence governmental
actions.
As a matter of public policy it is desirable to reduce business power
by denying the deductions for grassroots lobbying, whether such denial
results in tax equilibrium or a tax disadvantage to business.
Before ending the discussion of tax equilibrium, I would like to
point out the tax treatment of lobbying expenditures by other organi-
zations recognized by the Internal Revenue Code.
As we discussed earlier, a private citizen gets no deductions for
either his direct lobbying or his grassroots lobbying. A business, how-
ever, is entitled to a deduction for its direct lobbying, but not for his
grassroots lobbying.
Tax-exempt organizations are not concerned with the question of
whether lobbying expenses are deductible, because they pay no taxes
on their income.
The tax treatment of contributions to these organizations is im-
portant to the organizations and their donors. Charities and educa-
tionri and scientific organizations lose their tax-exempt status if they
engage in lobbying as more than an insubstantial part of their activity.
PAGENO="0052"
86
Therefore, these organizations are basically precluded from en-
gaging in lobbying.
Action or social welfare organizations can engage in lobbying, but
contributions to these organizations are nondeductible.
Labor unions likewise can engage in this type of lobbying. Union
dues, if they are ordinary and necessary business expenses, and if the
union member itemizes his deductions, are deductible unless the union
engages in lobbying as a substantial activity. If so, the union member
can still get a deduction for the portion of his dues allocable to direct
lobbying, but not for grassroots lobbying.
Business leagues, such as the chamber of commerce, are treated
similarly to labor unions. That is, deductions are allowed for dues
which are ordinary and necessary business expenses to the member,
and bear a direct relationship to the member's business unless a sub-
stantial part of the activities of the business league are lobbying.
In that event, the portion of the dues allocable th direct lobbying is
deductible, but the portion allocable to grassroots lobbying is
nondeductible.
The denial of deductions for grassroots lobbying, as we discussed
above, will a marginal impact at best. The funds used for this purpose
must come solely from the business organization itself, with no con-
tributions from the Federal Treasury. The significance of grassroots
lobbying is such that businesses will freely spend from their own funds,
because of the importance to them of the objectives to be obtained.
I believe that as a matter of policy it is desirable to require business
to pay for grassroots lobbying solely from its own funds, and that sec-
tion 162(e) (2) serves an important function by marginally reducing
that amount of grassroots lobbying engaged in by business. This func-
tion is only served, however, if section 162 (e) is regularly enforced.
With this background, I would like to review section 162(e) (2) and
the regulations thereunder, and discuss its application to expenditures
for advertising which are the subject of this hearing.
As pointed out above, section 162(e) (2) is a limitation and only has
application to expenditures which would otherwise qualify as ordinary
and necessary business expenses. Section 162(e) (2) denies deductions
for expenditures for grassroots lobbying if this expenditure satisfies
the three tests set forth below.
These tests I have determined both from the literal wording of the
statue and the regulations, and also from my interpretation of con-
gressional intent at the time or enactment of section 162 (e).
1. LEGISLATIVE MATTER
Before an advertisement is considered grassroots lobbying, it must
concern "legislative matters."
An expenditure for advertisement would be allowable as a deduc-
tion if the advertisement relates to something other than "legislative
matters."
In my opinion, the term "legislative matter" refers to matters which
are appropriately the subject of legislation.
I believe that an advertisement can relate to "legislative matters"
even though no legislation is pending with respect to the subject of the
advertisement at the time the advertisement is printed.
PAGENO="0053"
87
The regulations do not define "legislative matters." The regulations
which allow deductions for direct lobbying do, however, define the
terms "legislation or proposed legislation" to include "bills and res-
olutions introduced by a member of a legislative body, as well as oral
or written proposals for legislative action submitted to a legsilative
body or to a member of such body."
The term "legislative matters" is literally broader than the terms
"legislation or proposed legislation." I believe therefore that "legisla-
tive matters" can, under some circumstances, include matters which are
not the subject of pending legislation at the time the advertisement is
run.
The purpose of the denial of the deduction is to offset businesses'
superior financial and organizational strength with respect to legis-
lative matters. The need for this offset is as great when business is pre-
paring the public for anticipated legislation as it is when such legis-
lation is actually pending.
Furthermore, business can, to some extent, control the timing of
the introduction of the legislation favorable to the business, and can
anticipate the introduction of legislation unfavorable to business.
If section 162(e) (2) were only applicable when legislation was
actually pending, it could `be avoided by first conducting extensive
publicity campaigns to generate interest in the general public in the
passage of legislation, and at the conclusion of such campaign intro-
ducing the legislation itself.
The fact that legislation is pending, however, is important proof
that the subject of an advertisement is a legislative matter.
2. ATTEMPT TO INFLUBNCE GENERAL PUBLIC
If an advertisement relates to a legislative matter, the advertisement
must be considered in light of the second test, which is found in the
statute, "Does the advertisement amount to an attempt to influence the
general public?"
Deductions are only disallowed under section 162(e) (2) for expendi-
tures which amount to an "attempt" to influence the general public.
The determination of whether an advertisement constitutes such an
"attempt" can only be made by analyzing the advertisement itself to
determine if, as a whole, a reader of the advertisement might be "influ-
enced" with respect to a legislative matter.
For example, an advertisement relating to a legislative matter could
serve a purely educational purpose by fairly presenting all factors
which support both sides of an issue, and leaving the public the ability
to make up its own mind. An advertisement, however, which presents
only one side of an issue, would appear on its face to be an attempt to
influence the general public.
The regulations cite attempts to encourage the public to contact
members of a legislative body for the purpose of supporting or oppos-
ing legislation as examples of grassroots lobbying. The reference to
encouraging the public to contact legislators is an example, and I agree
with the earlier witness that an advertisement which doesn't directly
and literally encourage the public to contact legislators can still be an
attempt to influence the general public within the meaning of the
statute.
PAGENO="0054"
88
The statute itself refers to attempts to "influence the general public."
The general public can be influenced, and the statute can become appli-
cable, even if the public is not directly urged to contact legislators.
I feel, however, that an "attempt" can only be found in an advertise-
ment if the advertisement presents only factors which support the self-
ish interests of business.
For example, exhibit 39 is devoted to costs of clean air. The ad lists
a large number of additional expenses which the public bears as a
result of the Federal Clean Air Act. No mention whatsoever is made
of the benefits which the public derives from the Clean Air Act. As a
result, I feel that this ad can be readily classified as an attempt to influ-
ence the general public, even though the ad does not directly call for
the public to contact the Congressman.
I base this in part upon my confidence in the degree of political edu-
cation in our society and my belief that if an advertisement encour-
ages an individual to feel great concern about a legislative matter, that
individual knows that the way to express this concern is by contacting
his legislative representative.
An advertisement which generates such concern has the effect of
causing the public to contact its representative even though there is
no explicit instruction to do so on the face of the ad. The deductibility
of an expenditure for an advertisement should be governed by the
overall substance of the advertisement itself and not by the presence or
absence of any particular key words such as "contact your legislator."
The fact that an advertisement presents only one point of view and
contains a request for the public to contact its legislators would appear
to be almost conclusive evidence that these ads are an attempt to influ-
ence the general public.
I feel, however, that even absent this evidence, ads can be found to be
attempts to influence the general public based on the factors I discussed.
The two tests discussed above are the only ones found in the statute,
and the only ones covered by the regulations.
I believe, however, that there is a third factor which can be inferred
from congressional purpose, which must be present before section
162(e) is applied to disallow deductions. The tests standing alone,
as I have stated them, would deny the Washington Post a deduction
for the cost of publishing its editorial page. The editorial page relates
often to legislative matters and it is clearly an attempt to influence
the general public. Congress did not intend to deny the newspaper the
cost of preparing editorials.
For this reason section 162(e) (2) should only be applied to expendi-
tures in connection with matters in which the interests of business and
a segment of the public at large conflict, and the advertisement pro-
motes businesses' selfish interests.
An editorial published by a newspaper for the purpose of promot-
ing the newspaper's financial good at the expense of the general public,
or of subscribers, could well be subject to disallowance under section
162(e) (2).
On the other hand, an editorial relating to the subject in which a
newspaper, as a business entity, has no interest that is distinctly differ-
ent than any other member of the general public, should not be dis-
allowed.
For example, an editorial urging congressional ratification of an
arms limitation treaty would not involve a matter in which the news-
PAGENO="0055"
89
paper, as a business, has an interest different than that of the general
public.
A similar example might be an advertisement published by an oil
company which urges the enactment of laws relating to automobile
safety. In the matter of automobile safety, the oil company has no
financial interest which, generally speaking, conflicts with that of the
general public.
On the other hand, an advertisement by an automobile manufacturer
which opposes such legislation, might well involve a conflict between
the financial interest of the business and the general public at large.
It is my belief that the three foregoing tests should be applied to
the advertisements published by businesses, and that expenditures for
those advertisements which satisfy the three foregoing tests should
be disallowed.
There are two procedural points I would like to cover. First, the
application of the factors I have outlined is essentially a factfinding
process, and I believe that the determination of the initial finder of
fact should be given great weight. This was done in the present case
of Consumers Power Company v. United States, which was decided
in 1970.
In this case the u.S. Court of Appeals for the Sixth Circuit con-
sidered ads published by private power companies which related to
publicly operated power companies. Some also attacked public pow-
er as "creeping socialism," and others pointed out that private com-
panies provided better service.
Some of the ads admonished the readers to contact their Congress-
man, but some did not. There was no legislation pending at this time
to which the ads were related. The District Court disallowed the de-
ductions for expenditures on the grounds that these expenditures
amounted to grassroots lobbying.
The court of appeals expressed some reservations about the appli-
cation of the regulations, and noted that in the ads concerned, there
were some ads which the court of appeals felt were borderline cases,
but the court of appeals deferred to the judgement of the district
court and. sustained the disallowance of all of the deductions. I be-
lieve that it is proper for appellate courts to give some weight to the
determination of factfinders in cases such as these.
A. second procedural point which I would like to mention is il-
lustrated by some of the ads which have been introduced into evi-
dence into this record. In particular, I make reference to exhibit 66,
76, 81, and 88. These are ads in which the three elements that I have
discussed above are present, but only in a portion of the advertise-
ment. I feel that in such cases in which the three elements occupy
more than a de minimis part of the ad, that portion of the cost of the
ad which can be fairly allocated to the grassroots lobbying should
be disallowed.
I have reviewed the advertisements which have been admitted into
the record as exhibits No. 1 through 99, and applied to each one of
them the three foregoing tests. Of the advertisement I reviewed, it
is my opinion that 31 are deductible, 4 require some allocation because
a portion of the expense should be deductible, and the remainder
not, and there are 9 advertisements for which I felt I needed addi-
tional information; that is, information in addition to the ad itself,
in order to make a judgment. The remaining 51 ads, I felt were non-
PAGENO="0056"
90
deductible for Federal income tax purposes, based solely on applica-
tion of the factors that I described above to the ads themselves, and
without the benefit of any other knowledge of facts and circumstances
which might surround the publication of the ad.
The advertisements for which I felt I needed additional information
were 10, 11, 12, 15, 21, 22, 48, 91, and 94.
The advertisements which I felt would be deductible under the
three tests I have outlined above are exhibits 7, 9, 27, 40, 49, 51, 52, 56,
57, 58, 59, 60, 61, 62, 67, 69, 70, 71, 72, 75, 79, 80, 83, 84, 86, 87, 89, 92,
95, 98, and 99.
The advertisements which I felt could be subject to some allocation
were 66, 76, 81, and 88.
I found all other ads to be nondeductible under section 162 (e) (2).
In closing, I would like to say that I recognize the sponsors of these
and other ads are subject to all the responsibilities, and have all the
rights, which are inherent in our self-assessment system of income
taxation. Taxpayers are not required to pay amounts of income tax
greater than is required by law, nor are taxpayers required to resolve
every question of interpretation against themselves.
On the other hand, taxpayers have the responsibility, in the first
instance, to make a good faith determination as to the application of
the Internal Revenue laws to their business operations, and to com-
plete their returns and pay their taxes accordingly.
Expenditures for advertisements which represent clear attempts to
influence the general public with respect to legislative matters are not
deductible under section 162(e) (2). Such advertisements should not
be misclassified by taxpayers as goodwill advertising and should not
be claimed as tax deductions. The taxpayers are not, under the law,
entitled to such deductions.
I also feel that the Internal Revenue Service should vigorously en-
force the congressional mandate and the Service's own regulations.
It is true that consideration of the deductibility of advertisements
might involve some questions which are outside the scope of normal
auditing techniques. This is so, however, because the policy of section
162(e) (2) is based upon the broad consideration of public policy as
I have outlined above. Because of the importance of these public poh-
cies, I feel that the IRS and the taxpayers concerned have the duty to
see that this section is carried~ out and vigorously enforced. Even
though the policy does not relate to matters which are normally the sub-
ject of income tax audits, the matters are more important, in my opinion
than simply raising revenue for the Federal Government. They bear
upon the quality of the decisions which are made by the legislative
body.
Senator HART. You were right, Mr. Fant. You have made the code
understandable to me to the extent to which the code can be made
understandable. Let me dispose of something that occurred to me as
I listened to your suggestion that a third factor be included deter-
mining the deductibility of an ad.
It is the public matter, and seeking to influence opinion and deci-
sion. You say that the two tests above standing alone would be applied
to deny the Wa~shington Post a deduction for cost of writing and
printing its editorial page since the editorial page relates often to
legislative matters and is clearly an attempt to influence the general
public.
PAGENO="0057"
9.1
You did not intend to deny the newspaper the cost of preparing the
editorials. I quite agree with that. For this reason, section 162(e) (2)
should oniy be applied to expenditures in connection with matters
in which the interests of business and the public at large conflict.
And the advertisement promotes businesses and selfish interests.
And suggestions that an editorial in a newspaper seeking to promote
the newspapers financial good at the expense of the general public or
its subscribers could well be subject to disallowance.
That suggestion bothers me, because to take a newspaper, they edi-
torialize against increased mail rates. They have a deep conviction
that increasing the rates will drive some publications out of business,
and lessen the opportunity to have broad public education.
Who is to decide whether that `s an editorial-is in conflict with the
public interest or not?
Mr. FANT. Mr. Chairman, I agree with you that this is a tough
question. In the example you have given relating to newspaper edi-
torial concerning the cost of mailing, I would first want to determine
whether an increase in the cost of mailing would reduce the business'
profits, or whether it's the newspaper's view that the increase in the
cost of mailing is undesirable because it might, as the chairman pointed
out, affect the degree to which the views in the newspaper are dis-
seminated and distributed to the public.
If the latter is the case, I would feel that it would not be subject
to disallowance. If the former were the case, that is, that an increase in
mail rates could lead the newspaper to earn less profits than they
earned before, I think we would have a tough problem, because I
think that there would be two elements present, the one element which
favors the dissemination of views, broadly, to the people and a second
element, that the business is publishing the editorial so that it will
make a greater profit. And I feel that it's very hard to say that Exxon
cannot deduct the cost of a political advertisement which could in-
crease its profits, whereas a newspaper could get su~h a deduction
simply because the newspaper is a newspaper, and Exxon's an oil com-
pany.
I feel that would be a difficult issue to resolve.
Senator HART. There is another kind of ad that presents the same
problem, but in a less appealing setting than the newspapers' claim for
freedom to discuss ideas. I believe that at least one automobile manu-
facturer believes it's undesirable for several reasons to permit the
law to remain as it is with respect to clean air standards, because the
only way they can meet those standards is to add on a device called a
catalytic converter.
The ad says that the device is uneconomic, may prove very disap-
pointing because of maintenance problems, and may contribute to an
increase in economic concentration in the automobile industry.
It advertises that a change of the law is needed. Now, I'm sure it
would be true that if they didn't have to go to the converter, they
would make more money or lose less. I think that they also believe
that this is an add-on device that we will wish we hadn't hung our-
selves with.
This is an example of an ad that would give IRS trouble, isn't it?
Mr. FANT. Mr. Chairman, ads very similar to that are included in the
exhibits which are introduced into the record.
PAGENO="0058"
92
I think one of them was published by an automobile manufacturer.
My analysis of that situation would be as follows: Although the in-
terests of the business might be something broader than the interest
of increasing their profits by doing away with the catalytic converter,
doing away with the catalytic converter might well conflict with the
interests of the general public.
I am certain that there are some individuals, and there is a viewpoint
held which is that the catalytic converter is good.
Senator HART. That's the dominant feeling.
Mr. FANT. And that it is, I think, a pretty good example of the
problem which I am discussing which is, I breathe clean air and it's
good for my health, but it doesn't put any money in my pocket to try
to get a law passed to keep the air that way.
I think that is a case in which the business' selfish interest is
advanced.
Now, it's true that the business' selfish interest might coincide with
what is perceived by other members of the public as being the broad
national interest. But the conflict I think we are talking about is not
b~ween business and everyone else, or at least how everyone else per-
ceives their interest, but between business and some identifiable seg-
ment of the public which opposes congressional action, which advances
the selfish interests of business.
It's possible that business' selfish interest in some cases will coincide
with what is everyone's interests. But still, if this is an identifiable
segment of the public which opposes business, I don't believe that busi-
ness should be allowed to deduct the cost of their ads at the expense
of those who oppose them.
Senator HART. Well, I am glad I am not a tax lawyer and I am glad
I am not the IRS agent that is examining these things.
Mr. FANT. Well, Mr. Chairman, I am glad also that you are not a
tax lawyer, because there is a great deal of competition even now, and
also because I think we can all be grateful that you are where you are
rather than spending your time with other matters.
Senator HART. Let me have Mr. Bickwit direct some questions that
have been developed.
Mr. BICKWIT. Just on that last one, then, as I understand it, you
are saying that 162(e) (2) should only be applied to expenditures in
connection with matters in which the interests of business and an
identifiable segment of the public at large conflict.
Mr. FANT. That's right.
Mr. BIOKwIT. It needn't be established that the entire public at
large is in conflict with the business interest?
Mr. FANT. Well, I think that the problem is that we don't know
what the public's interest is, and it's the legislators who must deter-
mine that. There is no such thing as the public interest. It's the com-
peting interests within the public. And I think what I intend to refer
to is a subject in which the selfish interest of businesses compete with
some interest of an identifiable ~segment of the public.
Mr. BICKwIT. The test that you have given the subcommittee for
what would render these ads nondeductible is a broad one. I suspect
some will argue upon hearing it, that it would disqualify for deducti-
bility virtually any statement by an advertiser on any matter since
virtually any matter could become the subject of legislation.
How would you respond to that?
PAGENO="0059"
93
Mr. FANT. I think you are referring to my interpretation of the
words, "legislative matter," which I interpreted as being broader than
"legislation." I agree that that is a broad interpretation. I feel, how-
ever, that based on the policies which are involved, a broad interpreta-
tion is called for.
I also feel that as our society advances and progresses more matters
have become legislative matters than were previously. Some things
which Federal and the State legislative bodies consider, would be
shocking to 19th-century legislatures.
It's possible that in the 21st century there would be even more ques-
tions related to our national life that have considered legislative mat-
ters. But I feel that that is the way it should be, that if a matter be-
comes a legislative matter, advertisements related to that become
nondeductible. I also feel that it is perfectly possible for business to
publish good will advertisements on legislative matters provided they
don't amount to an attempt to influence the general public.
Businesses sometime say that an ad promotes their good will because
it keeps their name before the public and it wins the sympathy of the
general public.
I feel that business can publish ads which have that purpose which
present both sides on an issue. In fact, in my opinion, that the goal of
increasing business popularity with the public would be advanced by
an ad that fairly presents both sides of a legislative matter and is
signed by a business. Such an ad would relate to a legislative matter
but could be fully deductible.
It's the advertisements which are exclusively on one side of the
legislative matters in which there is a conflict that I feel are
nondeductible.
Mr. BIOKWIT. Are you aware of any private rulings by the IRS
which would either support or contradict the test that you have offered
to the subcommittee?
Mr. FA~rT. Well, of course, the private rulings issued by the IRS
are confidential at the present time. I might add that such secrecy is
subject to litigation at the present time as to whether the rulings
granted taxpayers should be made available to the general public.
I would also point out that as I analyze the question, and not
necessarily as the IRS would, the questions that we are dealing with
are essentially questions of fact. And as a matter of general policy,
the IRS does not give rulings in which they determine to be simply
questions of fact.
Most of their rulings are designed to answer questions of law or
questions of the application of law to facts. This does not mean that
there are no private rulings on the subject, it simply means I am not
aware of any.
Mr. BIOKWIT. How do you feel about not being able to have access
to those rulings?
Mr. FANT. Well, as I say, it is subject to litigation at the present
time and I personally hope that the court decides that these matters
will be available to the public. I cannot say that under the laws which
control the litigation, that would be the correct result, because I hon-
estly have not made a study of the laws involved.
Mr. BI0KwIT. The staff has attempted rather hurriedly to review
the leading cases on the provision of the code that has been discussed
today. While it is difficult for us to determine from those cases exactly
PAGENO="0060"
94
what the judge's tests were for nondeductibility, the only case that
we can find where the test would apply to be inconsistent with your
own is a memorandum opinion of the tax court in Addressograph-
Multigraph Corp., cited for the record as 14 P-H, tax court memo-
randum paragraph 45,058, 1945.
Do you distinguish that case, or do you simply disagree with its
holding?
Mr. FANT. Well, first of all, given the facts that are set forth in the
opinion in Addressograph-Multigraph, I can't be absolutely certain
whether applying the tests I have outlined, that different results would
be reached or not. The opinion does not set forth the body of the ads,
but only describes them in a very summary way.
I believe, however, that I would reach a different result.
Now, the importance of the Addressograph case to my analysis is
greatly diminished by the fact that the tax court judge in that opinion
relied very heavily upon an earlier case, the Los A'ngele$ c~ Salt Lake
Railroad case. In fact, the judge relied almost exclusively on the
earlier opinion and did not analyze the issues or discuss the factors
which should be applied.
The Los A'nqeles d, Salt Lake Railroad case was decided in 1929,
and permitted deductions for expenditures for grassroots lobbying on
the ground that the regulations then in force only applied to unethi-
cal or unfair lobbying, and that the advertisements published by the
Los Angeles & Salt Lake City Railroad Co. were not unethical or
unfair.
That view has been thoroughly discredited by later court cases, by
the Supreme Court in Uamrnara~o and by Congress in the enactment
of section 162. Since the court in Addressograph relied upon the ear-
lier case, it's my feeling that Addressograph itself must be viewed as
somewhat discredited.
Mr. BlcKwrr. Do you know of any other cases or published rulings
which have adopted a test inconsistent with the one that you have
presented to the subcommittee?
Mr. FANT. Well, there are no cases or published rulings of which I
am aware which explicitly adopt tests that are inconsistent or con-
trary to what I have set out today.
I feel that what I have set out today is generally supported* by
the case law.
I have to sa.y, however, that courts in many instances express their
opinion in a conclusionar fashion. It is quite possible that factors
other than those I have discussed were applied or that some of the
factors I discussed were not applied, so that I can't say with exact
certainty, but I am not aware of any case which would allow a deduc-
tion which, under the factors as I have outlined them, would be dis-
allowed.
Mr. BICRwIT. Have you read the responses of the companies to
Senator Hart's letter asking them to characterize their ads?
Mr. FANT. No, I have not.
Mr. Bicjcwrr. Well, even if not, if you heard the preceding witness
I am sure you are aware that generally speaking their characteriza-
tions of those ads differ sharply from your own.
If ultimately the subcommittee comes to accept your analysis rather
than theirs, what would you suggest the subcommittee do about it?
PAGENO="0061"
95
Mr. FANT. Well, first of all, I would like to reiterate what the pre-
vious witness said, that I don't think such a determination should be
made without hearing the other side, and without hearing the analy-
sis which might support the characterizations of the ads by those
who sponsored the ads.
1 also have to say that my analysis was based solely on the four
corners of the ad, and that in some instances there might be facts
and circumstances of which I am aware that could lead to a contrary
result, even under the factors I have presented.
For example, in the regulations that relate to lobbying by private
foundations, there is a provision which says that private foundations
can engage in publicity campaigns so long as both sides are fully pre-
senteci so that the reader of the publicity can make up his own
mind.
There is a provision that says that this can be applied to a whole
series of ads. For example-under this analysis there can be one ad
which says water pollution is very good and sets forth the economic
reasons why a certain amount of pollution is necessary and which if
I looked at it and applied my factors, I might well determine was
nondeductible.
However, if the next week in the same publication there was another
ad or the sponsor of the first ad that said that water pollution was bad,
I might reach a different result.
I give that as a fairly farfetched example, but I think that there
are other facts and circumstances which have to be considered.
If the subcommittee does arrive at the judgment that the sponsors
of these ads have claimed deductions for expenditures which, in the
subcommittee's judgment, are nondeductible, I believe that the first
purpose served by these hearings is to bring this to the attention of
the sponsors of the ads.
Ours is a system of self-assessment and, hopefully, if my analysis
and that of the previous witness and the other facts presented are
persuasive, the sponsors of the ads will not claim deductions for these
of future ads or conceivably might, if they were persuaded, file
amended tax returns.
I disagree somewhat with the previous witness on the role of citizen
participation in IRS proceedings.
I do know, however, that the IRS values any information which is
helpful to them in making determinations in tax cases, and I would
suggest that the record be made available to the IRS for whatever uses
they felt were appropriate.
Mr. BicKwrr. I have one final question. In your statement you say
that denial of deductions for grassroots lobbying under section 120
(e) (2) of a marginal impact at best, that it will have a marginal im-
pact on the problem of imbalance.
Mr. FANT. That's correct.
Mr. BloKwrr. Personally I tend to agree with that. Does that lead
you to the conclusion that if Congress is determined to remedy that
imbalance they will have to take on the other side of the equation, to
give more favorable tax treatment to those who are organized not for
profi~.
I don't want to put words into your mouth, but is that a conclusion
that you would support?
PAGENO="0062"
96
Mr. FANT. Well, as I pointed out earlier, the problem is one of im-
balance, and section 162(e) (2) does not correct the imbalance. The im-
balance still exists and will continue to exist.
I believe you are suggesting that a possible way to further the im-
balance would be to provide more favorable tax treatment to either
private citizens or to organizations which represent the interests of
private citizens.
I would first point out that the most-the greatest imbalance that
I find is in the section of direct lobbying, where as a result of the
amendments made in the Revenue Act of 1962 businesses can deduct
all of their expenses for making presentations to legislative bodies,
whereas charitable organizations, educational organizations, cannot
do so unless they are specifically invited to do so by legislative bodies
or members of committees.
That is the area in which I feel there is the-there is present im-
balance.
`On the subject of the tax treatment of grassroots lobbying, there
shouldn't be any imbalance. Such expenses are not generally deductible
by businesses, private individuals, charities, labor unions, nor business
leagues.
So that I feel in the first instance that if the law were followed,
there would be something approaching tax balance on the subject of
grassroots lobbying.
Now, if your suggestion is that possibly charitable organizations
or action organizations of citizens be allowed to engage in grassroots
lobby1ng and contributions be deductible, would you allow business a
deduction also; to allow charities to engage in grassroots lobbying, but
to continue to deny deductions to business would go further to correct
the imbalance. But I feel that more immediate and probably more prac-
tical result would be to bring equilibrium to the direct lobbying-
Mr. BICKWIT. I don't think I made clear what I mean by imbalance.
What I am talking about is the balance in the presentation that Con-
gress is likely to perceive from the various interests involved.
WThat I read you to be saying, is that even if you enforce the law so
that there is balanced treatment of deductions, there will not be bal-
ance with respect to the kind of viewpoints that are made available
to the Congress.
It is that statement with which I agree and it leads me personally
to the conclusion that perhaps other remedial measures from a stat-
utory standpoint ought to be considered in light of the conclusion
that the pure endorsement of the law as it exists will not remedy the
problem as I see it.
Mr. FANT. Well, that it will not remedy the broad problem, because
business, when it is vitally affected, can tap its enormous resources to
run all the ads it wants even though such ads are nondeductible. The
fact that it will cost business more because the ads are nondeductible
will not, in my opinion, deter business from engaging in grassroots
lobbying in areas where their interests are at stake.
Mr. BIORwIT. And it probably wouldn't deter them from engaging
in direct lobbying even if that were ma'de nondeductible ~
Mr. FANT. I believe that is true also.
But w~hat I was saying is that the ability of the tax law to further
correct the imbalance, I feel, is somewhat limited. I understood you
PAGENO="0063"
97
to be suggesting that charities or public interest groups be permitted
deductions for grassroots lobbying. This suggestion would reduce the
imbalance in the ability to influence the general public with respect
to legislative matters, `but would put the tax law itself into imbalance.
Mr. BICKWIT. Exactly. That is what I am suggesting, that you may
need imbalance within the tax code in order to promote a semblance
of balance.
Mr. FANT. I think that that would further reduce the imbalance.
Mr. BICKWIT. Thank you very much, Mr. Fant.
Thank you, Mr. Chairman.
Senator HART. Mr. Fant, again, thank you very much for a very
helpful explanation.
We like to think we don't operate in a vacuum and I am sure that
`both the IRS and the FPC should be made aware of some of the corn-
ment that has been made today.
But it is my intention that we invite those advertisers whose ma-
terials have `been identified to make an explanation as to their judg-
ment as to how it should have been treated and any suggestions they
may have with respect to the law.
Pending the announcement of that date, the subcommittee is ad-
j ourned.
[Whereupon, at 12:55 p.m., the subeoimnittee hearing was ad-
journed, subject to the call of the Chair.]
PAGENO="0064"
PAGENO="0065"
ENERGY AND ENVIRONMENTAL OBJECTIVES
THURSDAY, JULY 18, 1974
TJ.S. SENATE,
COMMITTEE ON COMMERCE,
SUBCOMMITrEE ON THE ENVIRONMENT,
Wa$hington, D.C.
The subcommittee met at 10:47 a.m., in room ~5110, of the Dirksen
Senate Office Building; Hon. Philip A. Hart (chairman of the sub-
committee) presiding.
Senator HART. The committee will be in order. I apologize to every-
one who was inconvenienced by this delay. It is simply that an unantic-
ipated meeting of the Democratic Conference of Senators was called
for this morning, and is still going on. I am sure this is not the only
place that has suffered. We resume hearings today on the energy
and environmental advertising.
At our last hearings a number of allegations were made with respect
to the tax and Power Commission treatment of these ads. The sub-
committee invited those against whom the criticisms had been di-
rected to respond. Although most declined, we are grateful to those
who have come today to present their side of what is a complicated
story.
With an expression of thanks, let me welcome as our first witness
Mr. Herb Schmertz, vice president of public affairs of Mobil.
STATEMENT OP HERB SCHMERTZ, VICE PRESIDENT, PUBLIC AP-
PAIRS, MOBIL OIL CO.; ACCOMPANIED BY DAVID A. LINDSAY
Mr. SCHMERTZ. Thank you, Senator Hart.
My name is Herbert Schmertz. I am vice president for public
affairs with Mobil Oil Corp., and I have been extensively involved
with my company's efforts to explain its viewpoint on energy prob-
lems to the public through advertising in the press, on radio, and
on television.
I am accompanied by David Lindsay, our outside tax counsel from
the law firm of Davis, Polk & Wardwell.
First, I would like to thank the committee, on behalf of Mobil and
myself, for the opportunity to appear before you today. As a com-
pany, Mobil takes pride in its communications program, and par-
ticularly in the stand for freedom of speech we have taken in the
belief that a free marketplace of ideas is essential if the American
public is to make informed decisions on major issues. I am therefore
grateful for the chance to explain some aspects of this program to you.
I would like to address myself first to some specific tax questions
in which you have expressed an interest.
(99)
42-367-75-------5
PAGENO="0066"
100
For tax purposes, Mobil divides its institutional advertising into
four groups, relying on concepts of public advertising contained in
Treasury Regulation 1.162-20. As you are aware, the regulation states
that "expenditures for institutional or `goodwill' advertising" are gen-
erally deductible. The regulation provides more specifically that:
A deduction will ordinarily be allowed for the cost of advertising which keeps
the taxpayer's name before the public in connection with encouraging contribu-
tions to such organizations as the Red Cross, the purchase of U.S. Savings Bends,
or participation in similar causes.
In addition, the regulation states that advertising expenditures are
tax deductible if the advertising "presents views on economic, financial,
social or other subjects of a general nature providing they do not in-
clude expenditures for lobbying, for promotion or defeat of legislation,
or for related propaganda.
Based on these considerations, our ads are grouped as follows:
Group I consists of ads of the so-called "Red Cross" variety. Some
of them have promoted Masterpiece Theatre, a series of dramas and
other programs underwritten by Mobil and shown over pithlic tele-
vision. We have also taken space to urge support for New York Public
Library, for programs of concerns, opera, and theater in New York
City parks, and for the activities of the Interracial Council for Busi-
ness Opportunity, to name only a few.
Group II deals with fuel conservation and safe driving-noncon-
troversial topics in which we have some expertise and which we feel
it is in the public interest to discuss. Ads in this group have dealt
with ways of conserving gasoline, driving safely, conserving fuel in
the home, and lighting in general.
Group Ill covers a broad socio-economic field dealing with such
subjects as technology in general, conservation efforts, and similar
broad topics.
Group IV covers advertisements which relate in part to regulatory
policies on antipollution control, or contain general information on
the energy shortage, or discuss other topics with sufilcient legislative
potential to cast doubt on their deductibility.
Our policy, simply stated, is to regard ads in the first three cate-
gories, which conform to the wording and intent of the regulation, as
deductible. We do not take deductions, however, for ads in group IV.
Moreover, we submit all our ads to outside counsel for their opinion
on the ads' tax deductibility, and counsel has instructions to adopt a
conservative standard in determining deductibility under the statutes,.
regulations, and case law on the subject.
This decision to take a conservative view of what constitutes tax
deductibility has obviously cost us money. For example, our news-
paper advertising expenditures in 1973 were as follows:
Product and service ads $326,000, goodwill advertising $799,000,
nondeductible advertising $411,000.
In other words, in 1973, out of a total newspaper advertising budget
of $1.5 million, we claimed no tax deduction for a quarter of it. Also, we
decided in mid-1973 tO discontinue gasoline advertising and redirect
our efforts to broad public issues and public information programs.
We would therefore expect that our percentage of nondeductible ad-
vertising would increase.
Let me explain why we have resorted to institutional advertising on
such a scale.
PAGENO="0067"
101
In brief, we believe that we have something important to say, and
that we can only get our message across through paid advertising. We
came to that decision after it became clear that other more traditional
tools were not succeeding. Try to rebut misinformed reporting with.
a letter to the editor, and you will usually find it appears-if at all-
many weeks after the original misstatement. Try to get your view
across in a news release, and it may never see the light of day.
Our major point, however, is not that the press is biased but rather
that the complexity of the energy issue results in inadequate coverage
of it in the news columns.
I would like to reiterate, Senator, we are not saymg that the press
is biased.
Hence, the decision to advertise, and the corollary decision-that it
would be pointless and self-defeating for us to engage in technical dis-
cussions of tax deductibility, even if a legitimate case could sometimes
be made. As a matter of policy, we prefer to battle on what we con-
sider to be the real issue here-a company's right to be heard in the
Nation's marketplace of ideas.
Let me backtrack a little to explain. As you may know, Mobil began
a regular program of advertising in the New York Times in January
1972. Our ads, appearing every Thursday, are on the page opposite the
editorial page-called the op-ed page. Prior to 1972, we had published
`an ad in this space in October 1970 in favor of better mass transpor-
tation-a highly unusual position, I might say, for an oil company at
that time-and had also taken the space to promote Masterpiece Thea-
ter, TV's Sesame Street and Electric Co., which we supported, and
other public service organizations. But by 1972 we had become suffi-
ciently concerned about the future of U.S. energy supplies to initiate
a full-fledged weekly campaign that would be highly visible.
In the light of the present energy situation, I think you will agree
that our concern was legitimate. We emphasized the need for in-
creased oil and natural gas production to meet escalating demand. At
the same time, we urged restraint in the use of oil products to conserve
existing supplies. We drew attention to the roadblocks in the way of
establishing a coherent national energy policy. We pointed out that,
without such a policy, we as a Nation faced unacceptable dependence
on foreign oil.
Nevertheless, for the vast majority, the energy crisis, if it existed at
all, was no more than a small cloud on the horizon at that time. Then,
of course, the crisis hit home last fall with the virtual quadrupling
of oil prices by the major producing countries outside the United
States, and the decision by some Arab countries to embargo the export
of crude oil to this country.
For the major oil companies, the Arab embargo produced a twofold
crisis. First, of course, there was a crisis of supply, which the oil corn-
panies surmounted to a large extent by a complex restructuring of
logistics patterns on a worldwide scale. Second-and more germane
to our present discussion-was a crisis of credibility.
In simple terms, the energy crisis which erupted in late 1973 caught
Government, the media, and the public totally unprepared. The grow-
ing gap between U.S. energy production and consumption, and the
prospect of increased dependence on insecure foreign supplies which
might be interdicted at any moment, simply had not been taken seri-
PAGENO="0068"
102
ousiy. The result was that, when the crisis came and the lines began to
form at the service station, the public looked around for a scapegoat.
The oil industry was a very visible and very convenient target.
Most people would agree that, during this crisis, the broadcast media
deluged their viewers with stories on energy. But how many people
could tell you what the answers were to some basic questions that
were prominently debated in the media at that time?
For example: Were tankers really waiting offshore for higher prices
before unloading their cargoes? Was the energy crisis contrived by
the oil companies? MThy are oil company profits so high? Why is the
United States so reliant on foreign oil? What role did Congress play
in creating the oil and gas shortage?
Despite the hours of broadcast time devoted to energy crisis, most
people don't have a clear conception of why or whether the energy
crisis existed. What they heard or saw didn't help them resolve the
issue.
It is my contention that many of the answers or explanations sim-
ply didn't make it through the comnTnmications networks. In fact, the
complexity, scope, and suddenness of the energy crisis combined to
overwhelm the media. Television was unprepared to cope with the tre-
mendous volume of information. News on energy broke so fast that
nearly each day brought a completely new story on the subject. The
problem of keeping up with the news was compounded by the fact
that so few reporters, outside the trade and business press, knew any-
thing about energy. Specialists were almost nonexistent.
The result was a breakdown in communications just when commu-
nication was critical. In short, the circuits couldn't handle the load.
The basic cause of this failure can be found in the structural limits
of television network news. Typically, a television news program has
to handle 10-12 stories in the space of half an hour, and for that rea-
son alone was unable to cover the energy crisis adequately.
Again, the networks apparently employ no energy experts to advise
on the content of news stories. Finally, television news is at least to
some extent entertainment, and broadcast journalists~ are forced
to worry about their ratings in competition with other network
journalists.
Against this background, television news failed in its coverage of
such recent energy stories as the tanker rumor, the Jackson and Church
hearings, the 1973 oil profits reports, why we are so dependent on
foreign oil, ~nd the role of Congress. These stories, so important in
creating and directing public opinion about energy, in our opinion,
were inaccurately and inadequately reported. A medium which stresses
topical entertainment and emotion in its news and public affairs pro-
graming cannot simultaneously provide in-depth coverage of such
complicated and controversial national issues.
Our conclusion is that network news has overdramatized and over-
simplified the energy story. The structure of broadcast news is inhibit-
ing rather than promoting full and robust debate on public issues such
as energy.
Now it is our belief that the American public deserves more infor-
mation than this structure allows. We choose to believe that, given
the facts, the public will weigh them and make rational decisions.
But our own efforts to give the public the facts as we see them,
PAGENO="0069"
103
through television advertising, have run into serious problems. For,
while the press has been willing to sell us space, and has hardly ever
disagreed with us over the substance or placement of an ad, it soon
became apparent that the networks were not ~only determined to be
the arbiter of what we could and could not say, but that they were
going to exercise their power in any extremely arbitrary way.
Specifically, we were told that network policy is not to sell time for
the discussion of "controversial issues of public importance." One
radio station-WTOP here in Washington-said the energy crisis
was a controversial issue and therefore they could accept no commer-
cials dealing with the subject. When it became clear to us that the
networks might be worried that they might have to provide free time
under the law for a rebuttal of Mobil's views, we offered to pay for any
rebuttal time the networks were required to provide, as well as for
our own message, with the networks having total control over whether
a rebuttal is required under the fairness doctrine and the, persons or
groups doing the rebuttal.
This offer, so far as I know, was unprecedented in the annals of
commercial television. But the networks have continued to insist as
a general principle that energy issues can best be covered in the news
programs, and that journalists should decide what should appear.
The final irony, of course, is that the oil industry-not television with
its three major networks-is accused of being an oligopoly.
One example will show you what we are up against. In an ad we
prepared to run on television, we plan to have the camera focus
throughout on a beach and ocean waves while the announcer says:
According to the U.S. Geological Survey, there may be 60 billion barrels of oil
or more beneath our continental shelves.
Some people say we should be drilling for that oil and gas. Others say we
shouldn't because of the possible environmental risks. We'd like to know what
you think.
Write Mobil Poll, Room 647, 150 East 42nd Street, N.Y. 1001~7.
We'd like to hear from you.
NBC accepted this ad without change. CBS turned it down in a letter
which in part read:
We regret that the subject matter of this commercial * * deals with a con-
troversial issue of public importance and does not fall within our "goods and
services" limitation for commercial acceptance.
ABC also turned down the ad in a letter which gave no explanation,
but merely said:
This will advise that we have reviewed the above-captioned commercial and
are unable to grant an approval for use over our facilities.
We decided that we could not let this capricious behavior go un-
challenged. We there-fore took out a newspaper ad which gives the
proposed visuals and text for our TV spot, together with the three
networks' replies.
So far we have received over 2,000 replies to this newspaper ad.
While we have not completed a total analysis, a quick spot check indi-
cates that the respondents overwhelmingly favor our right to express
our viewpoint on the air.
We feel these letters are the clearest indication yet that the public
wants the facts, and support our basic tenet that we as corporate citi-
zens with a spcial expertise in energy matters should be given the
PAGENO="0070"
104
opportunity to express our views in the marketplace of ideas. This
accords with our belief that, in a democracy, one of two things will
happen if we are allowed to exercise our rights.
If our views are correct, we will have made a positive contribution
to the national debate on energy policy and related issues, and we will
have helped the Nation establish the coherent set of priorities and
principles it needs in the energy field. If we are wrong, our ideas will
be shot down, and we will lose both money and reputation. We are
prepared to take our chances.
Indeed, the issue here is one of even greater importance than na-
tional energy policy, crucial though that may be. What is at stake here
is the principle that debate on national issues be allowed to proceed
unshackled by artificial constraints, a principle embodied in the first
amendment to the Constitution of the United States.
It is because of our company's commitment to free speech-both for
ourselves and our opponents-that we have filed a response with the
FTC to the petition submitted by six Members of Congress last Janu-
ary, which would have extended advertising substantiation regulations
beyond the realm of product advertising to the fields of energy and
environmental ideas.
As we stated in a memorandum ified by our attorneys with the
FTC, numerous Supreme Court decisions show that the petition consti-
tutes a serious incursion on first amendment rights of free speech.
These precedents show that in the interest of an unencumbered market-
place of ideas, the FTC's regulatory authority should be limited to
product advertising and should not extend to corporate statements
under public debate.
In fact, we said, the scope of the Congressmen's petition was so
broad:
That many forms of speech which are far removed from product solicitation
might possibly be covered. For every potential untruthful claim which will be
revealed or discouraged by such a rule, the expression of untold numbers of
honestly held beliefs will be discouraged.
Although Mobil can substantiate all of its advertisements, the com-
pany pointed out that the petition is further defective since only oil
companies but not their critics would be forced to meet substantiation
requirements.
I think I have said enough to shed some light both on the imme-
diate question of tax deductibility for certain types of advertising,
and on the underlying policy issues involved. To summarize our
position:
We take an extremely conservative view of what constitutes tax
deductibility for paid advertising. We take this view in the belief
that fundamental issues of national concern are at stake and we feel
we would do neither ourselves nor the country a service by losing
sight of them. We need a free marketplace of ideas in which those
with something to say can say it-untrammeled by redtape, cen-
sorship, and petty regulation. And we desperately need the coherent
national energy policy which can only come when the public has the
facts, and can make a balanced judgment of the issues on their merits.
[The attachment follows:]
PAGENO="0071"
105
Why do two networks
refuse to run th~s commercial?
As you can see from the storyboard repro-
duced above, we want to ask the public how it
teelsabout offshore drilling.
Butthe policies ottwo national television net-
works prevent us horn asking this question.
This isdange'ous, itseemstoun.Anyrestraint
onfreediscussion isdangerous. Anypolicythat
restrictsthetlowofinforrnationor ideas is poten-
tially harmful.
The networks say that the public's need for
information is bent served in news programs
prepared by broadcastjournulists.
Behind the networks' rejection of ideg adver-
tising may be the fear that demands for equal
timewillbernadc.Wehavea reasonableanswer
to that.We offer to payfor equal time, when the
request in legitimate.
Wethink more discussion, not less, is needed
of vital issues such as the issue of America's
energy needs. We're willing to buy the time to
say what we should be saying. We're milling to
buy time so you can hear opposing views.
But two big networks aren't willing to make
time available, in this case.
You know the principle at stake here, You've
seen it in writing, more than once:
"Congress shall make no law,,,
abridging the freedom of speech'
You've seen it in the First Amendment to
the Constitution of the United States, So
We'd liketo knowwhal you think abouteither
of these issues. Write Room 647,150 East42nd
Street, New York, N,Y, *
10017, Mobil
This ad will appear in the New York Times on Monday, June 17, 1971~.
Mr. SCHMERTZ. Thank you very much.
Senator HART. Thank you very much for your statement that goes
far behind the focus of what we thought we were treating when we
had that first day of hearing. I confess I have been on the Com-
munications Subcommittee of this Commerce Committee for several
years.
CBS:
`We regretthatthe subfect mattorotthts
commeeclal...deals with a contuoverstol
lssueol puhec lmpontasco and does nut
faflwtthls our `goods and services' tInkle-
Iaeceetanca
ABC:
"ThIs will advIse that we have reviewed
the above-csptlcned commercial and
are ramble to grant an appnvvol for eva
overeurfacOthest
NBC:
"Aptsrovedessubmllted:'
PAGENO="0072"
106
Mr. SCHMERTZ. I am aware of that.
Senator HART. Arid I have to go back to the first chapter every
time this question of what is and what is not required under the f air-
ness rule is raised. .
I get lost every time the issue is raised: One of the concerns, of
course, is that on important public questions there are usually at
least two bodies of opinion. One may happen to have a big wad of
money, and the other which may or may not have the better idea, may
have little or no money.
Mr. SCHMERTZ. That's right.
Senator HART. What suggestions do you have? Now Mobil picks
up the bill for the poor guys; we can't very well legislate that, can
we?.
Mr. Sciil\rERTz. Senator, it seems to me that when the Supreme
Court talked about this in the BEM case and the CBS case and the
Commissioners tidked about it, it seems to me that the networks ought
to start to try some experimentation to try to develop a structure that
increases the spectrum of views and opinion beyond just those of
the journalists. Now I don't know what the ultimate right answer
is, but at least the first step ought to be some sort of a national debate
on the problem of access. not only problems of oil company access,
*but problems of so-called public interest groups access and all the
rest. Out of that debate, and the networks should really take the lead
in this, it seems to me, ought to be some attempt at experimentation
~o develop a structure. Let's say for the sake of discussion that they
did set aside 10 percent of their time or something of that sort. And
some might pay, some might have free time within that structure.
Let's say that the network news were expanded to a full hour
which the networks apparently have wanted, and the affiliates have
resisted and if in that full hour some portion were given over to an
access situation.~ I don't know what the right answer is, Senator. I
am not in the network news and television business.
I do know that I have not seen any showing by the networks of a
desire to experiment, discuss, and try to develop a structure. I think
really the burden is on them to come forth. We have made what we
think is a contribution, hopefully, to stimulate that with our offer
to pay for the equal time. That was rejected.
We had hoped that perhaps that might stimulate some discussion
and debate.
Senator HART. A few years ago I remember a group of us here in
the Senate sought to purchase television time to present what was
then a minority view about Vietnam. And we couldn't buy it.
Mr. SOHMERTZ. That is the specific case that is relied upon by the
networks today; the Businessmen Against the War in Vietnam case
and the Democratic National Committee case are the two cases that
came to the Supreme Court a little over a year ago at the same time.
And that is the law of the land today. You prevailed up through the
circuit court.
Senator HART. Yes.
Well, having not solved the problem as it relates to television, how do
we solve it as it related to newspapers? Does the fellow who can buy
the full page get his idea across? What do we do about the opposing
point of vh~w that can't buy the page?
PAGENO="0073"
107
Mr. SOHMERTZ. I think newspapers are a very different situation for
two fundamental reasons, at least, Senator. First of all, I don't have
to get anybody's permission if I want to start a newspaper. I have
economic problems, obviously, but if I have a mimeograph machine I
can start a newspaper and really the growth of the underground press
is a demonstration of the vitality in the area. So I don't have to get
permission in that sense.
Second, newspapers, if you take the whole ball of wax of news-
papers, I think you are getting a pretty good diversity of opinion in
the print press. I think the print press does a pretty good job.
Now from our standpoint, we have felt that at least during a cer-
tain period we were not getting enough information in the unpaid
part of newspapers and that is why we felt obligated to try to redress
that balance through paid advertising.
But by and large, I don't think there is the major problem of access
and adequacy in print that you have in television. Television news to
a very large extent is a headline service. And as we all know headlines
don't tell the story.
Senator HART. Yes, as you put it, the structure of broadcast news
inhibits full and robust debate on public issues.
Mr. SOHMERTZ. I think that's correct. And when poles show that
60 or 70 percent of the people say that television news is their primary
source of information, that is a distressing situation. We now have
the most powerful communications medium ever developed, and it
is not acting as a flow of information to the people.
Senator HART. To react to one specific on the narrower subject of
tax treatment of institutional advertising, you tell us that your deci-
sion with respect to the category four type of advertising-I take
~t it was broader than that. You decided to submit your proposed
ads to outside tax counsel?
Mr. Sci-IMERTz. Yes.
Senator HART. That seems to me a costly, though very responsible
procedure.
Mr. SCHMERTZ. I would just recommend one thing, sir. We don't
submit them before we run them. We submit them after, so it is not
proposed ads.
Senator HART. But before, you determine how you shall handle
them financially?
Mr. ScIi~n~RTz. Yes, sir.
Mr. BIcuwIT. Just simply what led you to take that procedure?
Mr. SCHMERTZ. We came to the conclusion that we did not want
the issue of deductibility or nondeductibility to really cloud the bigger
issue of whether we could communicate adequately or not. There was
a much bigger issue involved here and that was the adequacy of
information and we just didn't want to get involved in what was a
narrower issue of deductibility and nondeductibility.
Mr. BIcKWIT. Thank you, Mr. Chairman.
Senator HART. I am sure you sense that the feeling with respect to
major oil companies is so sharp that many people have reacted harshly
to what you describe as a necessary educational program.
Mr. SCHMERTZ. We are well aware of that, Senator, yes.
Senator HM~T. In that sense, you are sort of damned if ~OR (10 and
dannecl if you don't.
PAGENO="0074"
108
Mr. SOHMERTZ. That is true. But when we looked at what we thought
our obligations were, we decided we would incur that with willingness.
Senator HART. I am reminded of not that particular ad, but some-
thing I heard in my own living room, my own family. A very attrac-
tive shot was run, and the message was missed at least by one part of
the audience in our house, who had a violent reaction to the ad. They
are spending more money than-
Mr. SCHMERTZ. That is a legitimate issue of debate, no question
about it. We are prepared to face that. And it is a problem.
Senator HART. Well, as you leave, let me express to you and Mobil
our appreciation of the fashion in which you have handled your
advertising.
Mr. Lindsay, did you have anything you would like to add?
Mr. LINDSAY. Nothing to add, Senator.
Senator HART. Our next witness is vice president and general coun-
sel of the American Electric Power Service Corp., Mr. Joseph Dowd.
Mr. Dowd~
STATEMENT OP FOSEPH DOWD, VICE PRESIDENT AND GENERAL
COUNSEL, AMERICAN ELECTRIC POWER SERVICE CORP.; AC-
COMPANIED BY A. W. D. GRONNINGSATER, TAX COUNSEL OP
THE SERVICE CORP.
Mr. DOWD. Good morning, Mr. Chairman.
Mr. Chairman, my name is A. Joseph Dowd. I am vice president and
general counsel of American Electric Power Service Corp.
The Service Corp. provides managerial, professional and technical
services to the operating companies of the AEP system.
With me today to assist in answering any questions you may have is
Mr. A. W. D. Gronningsater, tax counsel of the American Electric
Power Service Corp.
The American Electric Power system presently has a generating
capability of almost 14.5 million kilowatts and has, or soon will have,
about 8.? million kilowatts of additional generating capacity under
construction.
We serve in parts of seven States. Our service area ranges from the
Blue Ridge Mountains of southwestern Virginia to the shores of Lake
Michigan, and while we are a large system, we do not serve large urban
areas-rather we serve primarily a large number of small communities
and rural areas.
More than 5,700,000 people depend upon us for their electricity
supply-a responsibility that we take very seriously.
We are located to a large extent atop the eastern coalfields. We are,
therefore, a coal-based utility with 93 percent of our generating ca-
pacity fired by coal.
We have been invited to appear here today to respond to testimony
before this subcommittee which was presented on May 6 by Media
Access Project.
We understand that this hearing also involves consideration of S.
2532, which is described in its caption as a bill "to promote conserva-
tion, reduce wastage, and attain greater efficiency in the generation of
electrical energy."
While we do not propose to comment on the specifics of this bill, I
would like to make clea.r at the outset that the AEP system supports
PAGENO="0075"
109
sensible conservation efforts and has always been opposed and has
always done its best to eliminate wastage and inefficient utilization of
electric energy.
In fact, one of the ads in our current advertising program is devoted
entirely to promoting the concept of energy conservation.
Beyond this, we have distributed booklets and customer bill inserts
and radio and TV messages urging our customers not to waste electric
power.
Insofar as "efficiency in the generfttion of electric energy" is con-
cerned, the AEP system ranks first in the Nation, that is, we are able
to squeeze more kilowatt hours from a given amount of fuel than any
other system.
By way of background to our ad program, I would like to go on in
this vein somewhat. While sensible conservation efforts are desirable,
we should not be deluded into the belief that such efforts alone can
solve our Nation's energy problems.
Total energy has been growing in recent years at a rate of just under
5 percent, and electric power at `a rate of 71/2 percent.
We must be extremely careful in putting the brakes on, for any
attempt to go well beyond eliminating waste in order to curtail energy
growth sharply could precipitate a worsening of economic conditions,
including widespread unemployment.
Barring mandatory conservation of electric power-either by legis-
lation or by the insufficiency of generating capacity or fuel-we do not
foresee any substantial reduction in the historical growth of electric
power `during the next several years. `The reasons for this are as
follows:
First, we believe voluntary conservation is at its height in the first
flush of enthusiasm and tends to decrease as it results in any real
inconvenience or discomfort.
This is merely a reflection of human nature.
Moreover, the elimination of waste is, in large part, a one-shot
proposition.
For example, you can replace a 100-watt bulb with a 60-watt bulb
only once. Therefore, the effect of voluntary conservation on growth
rates after the first year will, we believe, be much less.
Second, putting population growth to one side, the age composition
of our existing population alone must inevitably result in new family
formations and increased usage of electricity.
Third, there will be demands for an ever-increasing standard of
living-particularly by the lower income groups who will insist quite
properly upon improving their economic status.
Fourth, there will be new uses for electric power-not the least of
which are for environmental controls. A recent survey indicated that
such use now represents 7 percent to 10 percent of the electricity de-
mand of large industry.
Fifth, in many cases, electric power is being required to replace other
sources of energy which are in short supply, that is, gas and oil.
We can already see this in residential electric space heating which
is now growing even faster than in prior years when it was being en-
couraged by vigorous promotion.
In fact, FEA Administrator Sawhill in a recent speech stated that
he expects, and I quote, ". . . the electric power industry to provide
PAGENO="0076"
110
electrical energy in increasing proportions for end-use activities, such
as space heating and transportation."
All forecasts for long-range energy requirements suggest that elec-
tric power will have a growing responsibility in supplying the energy
needs of the future.
Electric power should, and will, replace gas and oil wherever prac-
ticable-to conserve these fuels for uses for which there are no sub-
stitutes.
Indeed, as I have indicated, this process has already begun in the
field of space heating.
The solution-at least for the short term-and midterm-is greatly
to increase the production and use of coal to generate electric power.
And this is the basic theme of AEP's current advertising program
which was referred to by Mr. Shulman of Media Access in his May
6 testimony.
As an electric public utility, we have a legal and a moral respon-
sibility to anticipate the future demand of our customers and to have
available for them at the moment of need an adequate and reliable
supply of electric energy.
In order to satisfy this responsibility, we must forecast future
demand as accurately as we know how, plan and construct the neces-
sarv physical facilities in time to meet our customers' requirements,
and insure the availability of the necessary fuel to operate in those
facilities.
Fuel supply is our most immediate and our most critical problem-
currently and for at least the next 10 to 15 years.
Under `existing technology, we can generate significant amounts of
commercial electric power ouly by the use of falling water at hydro-
electric plants or by the use of gas, oil, nuclear fuel, or coal.
Hydroelectric sites are limited and can make only a relatively minor
contribution to our future power supply. As we all know, gas and
oil are in short supply.
There is even some que.stion as to the extent of our nuclear fuel
reserves-particularly our domestic reserves-and there is a growing
question about the adequacy of our nuclear fuel refining capacity.
But, in any event, the delays associated with the design, equip-
ment, construction, and licensing of nuclear plants make it impos-
sible to count on bringing in a nuclear plant in much less than 8 to
10 years.
Nuclear power is important and can provide some help for the short
term and midterm. But at best, such help will represent only a minor
part of what will be required.
And then there is coal.
Coal is the key element in the solution of our short term and mid-
term fuel problem. Our domestic reserves represent a greater Btu con-
tent than all of the oil in the Middle East, and can provide a fuel sup-
ply adequate to generate our electric power requirements for at least
several hundred years.
In this context it is indeed anomalous that coal, which constitutes
93 percent of our fOssil fuel resources, provides only 17 percent of our
gross energy.
Obviously, we must greatly increase the production and use of
coal to generate electric power.
PAGENO="0077"
111
This will not only solve most of the problem for electric power
supply. It will also make a major contribution to easing the demand
for gas and oil by making them more available for those uses for
which there are no substitutes.
Under these circumstances, one would have thought that the Gov-
ernment would have adopted policies to encourage the greater pro-
duction and use of coal.
But the hard fact is that Govermnent policies have, instead, inter-
posed major obstacles and, at the present time, are, in fact, discourag-
ing the production and use of coal.
The use of coal is being discouraged primarily by those who are
not satisfied with compliance with ambient air quality standards
prescribed to protect health, but who insist that there must be com-
pliance, as well, with rigid emission limitations, under rigid time-
tables, which at least in the case of sulfur dioxide emissions, are
wholly unrealistic and, indeed, unattainable.
These SO2 limitations will by mid-1975 have the effect of prohibit-
ing the burning of most of our eastern coal-about 225 million tons, or
more than one-third of our Nation's current requirements.
And in connection with the very large amount of iow sulfur coal
in the west owned by the Federal Governrnent-which could be ob-
tained most quickly and which would be most useful in dealing with
the SO2 problem-we have had the equivalent of a domestic embargo
for a year or more with the cold comfort of periodic, reports that the
matter is under study and that perhaps some decisions will be made
by the end of 1974.
The basic purpose-the thrust-of our advertising program is to
inform the public as to these facts, and to hopefully bring about an
increase in the production and the available supply of coal so that
we can meet these electric power needs of the 5,700,000 people who
are totally dependent upon us for electricity in their homes and in
their jobs.
Without a very substantial increase in the supply of burnable coal,
AEP and other electric utilities will not be able to meet the electric
power needs of our people.
Our responsibility for energy supply to the more than 5.7 million
people who are totally dependent upon us has, in our view, made it
not merely appropriate, but imperative, that we inform them and
the public generally of the facts of life with respect to energy supply.
Coal-particularly low-sulfur coal-is in very tight supply. As a
result, its cost has been skyrocketing-more than quadrupling in the
last few years.
During that time, coal prices have shot up froth about $10 per ton
t.o as much as $40 per ton and more.
In fact, according to a June 7 FPC news release, the price of spot
coal jumped by more than 54 percent in just 2 months-from Decem-
ber 1973 tø February 1974. And it is still rising.
The AEP system expects to burn about 37 million tons of coal this
year-second only to the Tennessee Valley Authority.
To the extent that our advertising program succeeds in bringing
about an increase in the available supply of coal, coal prices will be
less than they otherwise would be, and this difference would be di-
rectly and almost immediately passed on to our customers via the fuel
adjustment clauses in our tariffs.
PAGENO="0078"
112
Thus, n saving of $1 per ton would result in a $37 million benefit
to our customers; a saving of as little as 25 cents per ton would bene-
fit our ratepayers in an amount in excess of $9 million.
For all of these reasons, it seems clear to us that the cost of these
ads are properly chargeable above the line for ratemaking purposes
because they are clearly for the benefit of our ratepayers: First, by
attempting to assure an adequate and reliable supply of power for
them; and second, by attempting to bring about a reduction in the
cost to them of that power supply.
With respect to the deductibility of our ads for Federal income tax
purposes, such deductibility depends upon the intent and content of
the particular ad. This is implicit in much of the testimony at the May
6 hearing.
Prior to 1962, there was no legislation on the subject. It is important
to understand that all of the court decisions on the point cited at the
May 6 hearing dealt with taxable years governed by the Internal Rev-
enue Code of 1939, and relied on broadly worded regulations. Similar
language of broad scope was contained in the original regulations un-
der the Internal Revenue Code of 1954.
Congress legislated on this matter for the first time in 1962 by adding
section 162(e) to the Code. The 1962 provision was liberalizing legisla-
tion which permitted the deduction of, among other things, costs in-
curred in connection with legislative appearances-expenses which
theretofore were nondeductible.
In 1965, the Treasury Department adopted regulations under new
section 162(e). These new regulations do not go so far in the direction
of denying deductibility as did the old regulations.
This was admitted by Mr. Shulman, who stated that C~* * * pre-1965
IRS regulations appear to have taken a broader view in favor of non-
deductibility."
The point is that it is the more liberal 1962 code and the more liberal
1965 regulations that apply to the ads in question.
On the other hand, the court decisions calling for nondeductibility
cited at the May 6 hearing were all decided on the basis of regulations
which are no longer in force. There have been no court decisions under
the liberalizing 1962 legislation which are in point.
Our guidelines, therefore, are limited to the language of the pres-
ently applicable statute and the regulations promulgated thereunder.
1 have attached for the subcommittee's information as an exhibit to
my testimony a tax memorandum by Mr. Gronningsater seting forth
our position on the application of the statute and regulations to our ad
program. I will only attempt briefly to summarize that position here.
The regulations under section 162(e) of the Code focus upon activi-
ties which urge or encourage the public to contact members of a legis-
lative body for the purpose of proposing, supporting, or opposing
legislation.
A deduction is denied in such cases. However, the regulations also
explicitly recognize that "expenditures for advertising which presents
views on economic, financial, social, or other subjects of a general na-
ture," but which does not involve any of certain activities specified in
other subsections of the regulations, are deductible.
In AEP's current advertising program, 20 ads have been published
to date. Only one of these ads specifically urges or encourages the
public to contact their legislative Representatives.
PAGENO="0079"
113
We do not propose to deduct the cost of that ad for Federal income
tax purposes, even though the ad makes no reference to specific legis-
lation.
Of the remaining 19 ads, 11 make no mention of legislation; and
their costs, we submit, clearly are deductible. The "Mr. President" ad
referred to by Mr. Shulman at page 30 of the May 6 transcript is in
this category.
However, I would note for the record that that ad preceded and
is not a part of our current advertising program.
The remaining eight ads, one of which was referred to by Mr.
Shulman at page 20 of the hearing transcript, do refer to the neces-
sity for amending the Clean Air Act if we and other electric utilities
are to continue to be able to furnish an adequate and reliable supply
of electric energy to our customers.
However, these ads also refer to a number of other things, and
the readers are not urged to contact their legislators or, in fact, to
take any action whatsoever.
While the matter may not be free from doubt, it is the considered
opinion of our tax counsel that the applicable statute and regula-
tions, which undeniably are more liberal than the old regulations, do
permit the deduction of the cost of these eight ads.
I would like to conclude, Mr. Chairman, by saying `that it has been
our experience that those who oppose the deductibility of advertising
costs of their chargeability above the line are generally also opposed
to the substance of those ads.
At least in our minds, `this gives rise to the inference that those who
disagree with what we say, by urging reinterpretation or changes in
the tax or regulatory laws, may in fact be attempting to inhibit us
from speaking out on issues which we believe are of vital concern to
those we serve.
In the case of our current advertising program, tax and ratemaking
factors applicable to this advertising were not a consideration.
Presumably, these questions will be decided at the appropriate time
by the tax and regulatory authorities.
However, in order to emphasize, in order to bring home the point
that these factors really were not a consideration in our ad program,
and in order to prevent this very peripheral issue from detracting
from the important message that we are trying to convey, we propose,
for accounting purposes, to charge the costs of our current advertising
program to FPC account No. 426.4-a below-the-line account-even
though, as I indicated earlier, we believe that they could properly be
accounted for above the line.
Our objective has been to lay the facts regarding energy supply
problems before our customers and the American public generally, just
as effectively as possible. This, we believe, we are doing-and in the
context of our current energy problems, this we believe we have an ob-
ligation to do.
Thank you.
Senator HART. Thank you very much.
Mr. Dowd, I confess after reading your statement and listening to
your testimony, making some notes, what I had earlier described
was a narrow focus, 1-day hearing on an issue I thought I completely
understood, raises a whole series of very basic policy questions.
PAGENO="0080"
114
I will ask Mr. Bickwit to sharpen up some of your comments about
the specific ads. I think that although it was inadvertent, all of us
will be better here in Congress for having opened the broader hearing.
Mr. BIOKwIT. Thank you, Mr. Chairman. In your statement you say
that the solution to our energy problems, at least for the short and
mid-term, is greatly to increase the production and use of coal to gen-
erate electric power. What, precisely, in your view should Congress do
to achieve that objective ~
Mr. DowD. Basically, it should, in our view, amend the Clean Air
Act to make it absolutely clear that it was the intention of Congress
to protect the public health and welfare by maintaining the ambient
standards and that the owner of an emission source, if he is able to meet
the ambient standards, should be permitted to employ whatever
method he feels to be most appropriate.
Now, by that I mean the so-called intermittent control strategy
should be regarded as a full fledged alternative to emission limita-
tions. On the AEP system, we feel that we can avoid contributing to
violations of the ambient standards in our areas through the use of tall
stacks which we already have. Through a very sophisticated monitor-
ing system which has already been installed throughout system and
through a commitment to reduce emissions when atmospheric condi-
tions create problems.
Now, emissions can be reduced in one of two ways. Either by burn-
ing `a limited supply of low sulfur coal kept on-site for use during
such times or by diverting generation to a plant outside of the area
where the atmospheric problems exist.
This is one principal method. Tinder this program, low sulfur east-
ern coal continues to be burned. Now, the other major factor and this
does not necessarily require congressional action, is to lift the mora-
torium on the leasing of the coal lands in the West.
There are vast quantities of very low sulfur coal that would meet
existing requirements. This can be mined quickly, it can be mined
safely.
Mr. BlcKwrr. Are you saying that in your view the action you have
specified as legislative is essential for the purposes you seek?
Mr. DOWD. Yes; this is our view. I might mention one other thing
that is presently before the Congress. And that is the surface-mining
legislation. Again it is my understanding that the Udall bill would, in
effect, rule out the use of additional large quantities of the Nation's
coal. And this is a factor that the `Congress ought to look very care-
fully at in this period of energy crisis.
Mr. BICKWIT. In your statement you say:
The basic purpose, or thrust, of our advertising program is to inform `the pub-
lic as to these facts `and hopefully `bring about an increase in the production and
available supply of coal so that we can meet these electric power needs.
it is your testimony then, as I underst'and it, that the basic purpose
of your `ad campaign is to achieve goals which you have `also said
really `cannot be achieved without legislation.
Mr. Dowr. Well, there are two-we have said clearly in `a number of
our ads that the Federal-that the Clean Air Act must he amended
to permit intermittent controls. Insofar `as the western coal is con-
cerned, that actually can be done by administrative action. We are
PAGENO="0081"
115
telling the public that unless actions similar to these are taken, we are
going to have a very, very difficult situation this time next year.
Mr. BICKwIT. On the coal mining as I understood your testimony
you are also saying that if legislation like the lJdall bill passes, then
your goals cannot be achieved.
Mr. DOWD. That our goals cannot be achieved?
Mr. BICKwIT. Yes.
Mr. Down. I would say that a bill such as the TJdall bill would com-
pound the situation and make unavailable to us very, very substan-
tial additional quantities of coal that :are presently available.
So, it would compound our problem, certainly.
Mr. BIOKwIT. Given that the basic purpose of your and campaign
was to achieve goals for which legislation is needed or for which the
opposition-certain opposition to legislation is desirable, is it also your
testimony that the ads dealt with in the hearings of this subcommittee
were aimed at influencing legislation?
Mr. DowD. The basic purpose was to inform the public particularly
in our service areas as to what we regard the facts of life as to energy
supply and the problems we are facing with respect to energy supply.
To the extent that we refer to amendments of the Clean Air Act, yes;
we were advising them that unless the act were amended to permit
intermittent controls, it would be very difficult if not impossible to
meet the power requirements next year.
Mr. BIOKwIT. So, your testimony is that your ads were aimed at
informing the public and that it was the end of those ads to promote
the result of expanding the supply of coal for the production of
electric power.
Mr. Down. This was the hoped for ultimate end of the ad. There was
another purpose. We are aware of the situation; we are in the front
line so to speak.
We have to think in terms of the future. Where will we get the coal?
And in that sense we have an obligation to advise, we feel, our cus-
tomers of the situation whether they do anything about it or not. Our
concern in part is that in 1 year or 2 years from now, they will come
back and say why didn't you tell us these things. We will have fulfilled
that obligation.
Mr. BI0KwIT. But your basic purpose as you say was to bring about
an increase in the production and available supply of coal.
Mr. DowD. I would say yes to that question.
Mr. BICKwIT. In that you were informing the public and that you re-
garded that as an objective of your ads, and given that the basic
purpose of those ads was to expand the supply of coal for electric
power, how did you expect that informing the public would lead to
the basic purpose being accomplished ~
Mr. Dowi. Well, it seemed to us that one method would be to,
through administrative action, to release the moratorium, to lift the
moratorium on western coal. In one of our ads we specifically asked
the public to contact their Congressman.
In the other ads we did not do so, as I say, we lay the facts before
the public. We tell them what problem there are. We tell them what we
believe the solution to the problem is, and then it seems to me we just
have fulfilled our obligation in that sense.
42-367-75----6
PAGENO="0082"
116
This was what we were trying to achieve.
Mr. BICKwIT. Yes.
Mr. DowD. Now, they can contact their Congressman and seek amend-
ments to the Clean Air Act, they may not, but at least we have told
them what the problem is and we have told them how we think the prob-
lem can be resolved.
Mr. BICKWIT. But you have said that it was your intention that by
informing the public as to these facts, you would hopefully bring
about an increase in the production and available supply of coal.
Mr. DowD. Yes.
Mr. BICKwIT. My question to you is, How did you expect that to
happen?
Mr. DowD. Well, in two ways. We would hope that the ads would
stimulate interest on the part of the public and that they would exert
pressure, that they would contact their representatives in terms of the
Clean Air Act.
This was a hope and on the other side with respect to the western
coal moratorium, this as I indicated is something that can be done
without legislative action, that if they would contact the appropriate
administrative officials, the ultimate goal really being not so much to
increase the supply of coal as to be able to generate electricity to supply
their needs in the future.
Again, the increased availability and usage of coal is an essential
step to the ultimate goal which is to continue to supply these people
with electric power.
Mr. BICKWIT. Well, if you were informing the public to this end,
the end that you have just mentioned and you hoped through the in-
forming of them that they would be spurred into contacting their
Congressman, the obvious question is why was this not an attempt to
influence the public with respect to legislative matters?
Mr. DOWD. Are you talking now on the tax side or the accounting
side?
Mr. BIOKWIT. Yes.
Mr. Dowry. I will pass this to Mr. Gronnin~sater but we are oper-
ating under specific language statute and specific language in specific
regulations.
Mr. GR0NNINGsATER. In the first place as Mr. Dowd has pointed out,
there are two things involved here. Insofar as releasing western coal
for mining is concerned, that is not a legislative matter.
The 1962 legislation refers only to legislative matters in the context
of these ads.
On May 6, there was testimony by Mr. Lester Fant who stated they
had been requested by this subcommittee to look into these matters,
section 162(e). He made an analysis of the present requirements of
nondeductibility under the new regulations those were operating under.
First, is that there must be a reference to legislative matters. That
does not include, I do not think the administrative action.
The second was that there must be an attempt to influence the gen-
eral public and that I think, is the point that you are speaking of, Mr.
Bickwit.
Then he said, now, these are the only two specific legislativerequire-
ments. But I think-he said that he thought that it could inferred
from the congressional purpose that there was really a third test, and
that was-unless the advertising, unless there was a conflict of interest
PAGENO="0083"
117
in the advertising, between the business of the advertiser and what he
called the selfish business of the advertiser and the interest of the
public, the cost of the ad should be deductible.
Now, our opinion is and maybe other people will differ with it, these
ads are not against the interest of the general public. We think they
are in the interest of the general public.
Mr. BIOKwIT. Under questioning, Mr. Fant, as I understood him,
amended his testimony to say that all that would be required would
be some conflict of interest between the business and some identifiable
segment of the general public. Now it seems clear from testimony
we have received that an identifiable segment of the general public
regards it as a conflict of interest.
Mr. GRONNINGSATER. What an identifiable segment of the general
public would be. You have an interest contrary to the purpose of
our ads. We are of course, primarily concerned with our own service
territory.
Mr. BlcKwrr. Excuse me, I missed that.
Mr. GRONNINGSATER. We are primarily concerned with our own
service territory and our own customers `but we are also, in a sense,
speaking of the problems of our industry as a whole.
Mr. BIOKwIT. Well, the identical segment of the general public
I am speaking of are those who do not want to see the Clean Air
Act repealed.
Mr. GRONNINGSATER. Well, there is no definition of so many of these
terms. I wouldn't have thought that that was a segment of the public.
Because here you have, you are speaking of the Nation as a whole.
And you `have a person here who believes that so and so, and his next-
door neighbor believes something else. I would not have thought that
that was a segment, an identifiable segment of the general public.
Mr. Fant `also, to give an illustration of selfish business interest,
spoke of trying to make more profit or, well, one way or another try-
ing to make more profit I think was the thrust of his example.
That is not what we are trying to do here. We are trying to be able
to continue to furnish adequate and reliable service. One of the thrusts
of our ads is to try to get the cost of coal down. Being a regulated
company, if the cost of coal goes down, our rates go down.
Mr. BICKWIT. Is it your testimony that if the cost of coal goes down
your rates go down, you make no increase in profit ~
Mr. Down. That's correct because we have automatic fuel clauses in
our tariffs. As the cost of coal goes up, these increases are automatically
passed on to the public in the form of higher charges for electricity.
Should those costs either go down or not go up as rapidly as they other-
wise would as a result of increasing the available supply of coal, then
`this benefit would almost automatically and immediately inure to the
benefit of the ratepayers without the power company itself making a
profit.
Mr. BloKwrr. If you sell more electricity, do you make more profit?
Mr. Down. I think our rates are subject to regulation, and the answer
`to that is yes, we get an allowed return. So, the more electricity that
is sold, the greater the net income of the company would be under
normal circumstances.
Mr. BICKWIT. Wouldn't a lowering of rates bring about an increase
in sales?
PAGENO="0084"
118
Mr. Dowry. Well, there is a big, big debate as to the elasticity of
demand for electricity. We feel that there probably is some elasticity
when you are in the area of pure wastage or when you are in an area
where there are substitutes available. But even in the field of space
heating we are in a query whether there are substitutes available with
coal and natural gas being in such short supply. That is a very difficult
question to answer. If the rates were to go down-really what we are
talking about is that they would not go up as rapidly as they have been
going up; I think as a practical matter that would be the net effect
of this.
Mr. GRONNINGSATER. If I might add a word to that, we have testified
before, years ago, in other connections, about elasticity of demand.
But that was in a period, speaking about making more profit, of rela-
tively stable costs. In fact, all we had was decreases.
We are not in a posture where everything has gone up so, capital
costs, the cost of money, the cost of fuel, that may be suspended for
awhile.
What we are really looking at is to be able to continue to supply our
customers.
Mr. BICKWIT. Are you subscribing to Mr. Fant's analysis in saying
that under that analysis your ads are deductible?
Mr. GRONNINGSATER. I am saying under his analysis, I am not say-
ing he is 100 percent right in every respect, but this was his analysis.
Mr. BIOKwIT. And under his analysis you believe those ads are
deductible.
Mr. GR0NNINGSATER. Yes. Of course, there is one ad where we sug-
gested to the reader that if he agreed with us that he get in touch with
his Congressman.
As Mr. Dowd testified, we do not propose to deduct the cost of that
ad.
Mr. BlaKwrr. Why is that? Isn't that motivated by the public
interest also?
Mr. GR0NNINOSATER. Well, simply because there is so much emphasis
in the new regulations on urging the reader to get in touch with his
Congressman.
As Mr. Dowd testified, tax was not an important consideration here
at all anyhow. But with that emphasis in the regulations on contact-
ing your legislator, we don't want to argue about that.
Mr. BICKwIT. Is it your view that the urging of the public to
contact one's Congressman is what makes an ad nondeductible?
Mr. GR0NNING5ATER. Well, what the word should be, I don't know.
That is something else.
As you say, this whole program of ads, broadly speaking, has the
same thrust. This was brought out in the May 6 testimony by Media
Access Project. There is an emphasis on that in the new regulations
that there was not in the old regulations.
Mr. BICKwIT. Do you feel it is controlling? I guess the better way
to put the quest.ion is, are you saying that if you don't urge the public
to contact a Congressman, that it is deductible?
Mr. G-R0NNING5ATER. Well, that would depend to some extent on
the purpose of the advertising, perhaps. But in the context of our ads,.
I would say yes. It should be deductible.
Now, the matter of course is not free from doubt. There has been,
as Mr. Dowd testified, there has been no case under the-involving
PAGENO="0085"
119
taxable years covered by the new legislation and regulations that
really is closely enough in point to cite.
Mr. BIcKwIT. Now, why isn't the Consumer's Power case covered by
the new regulations?
Mr. GRONNINGSATER. It involved the years 1954 to 1957.
Mr. BICKWIT. That `s right.
Mr. GRONNING5ATER. It came down in 1970, but involved the years
1954 to 1957.
Mr. BICKwIT. That's right, but which regulations did the court
apply in that case?
Mr. GR0NNINGsATER. Well, what the court in effect applied was
perhaps the old regulations that were promulgated over and over
again under the 1939 and earlier years, because the specific language
in this field, well, for these years, were not promulgated until 1959.
Now, it is true, let me retract that, because by the time this case was
decided those regulations had been promulgated. Even though they
were promulgated after the end of the taxable years involved.
As Mr. Shulman emphasized, in the old regulations there was
language about propaganda that had no tie-in to do anything else,
no tie-in to legislate matters. And that is not so under the present
regulations.
Mr. BICKwIT. In the regulations, as I read them, there is-that were
applicable to the Consumer's Power case-a reference to promoting or
defeating the legislation. And there is a definition of promoting or
defeating legislation which as I read the regulations is the same
definition as applicable to ads run today.
Do you disagree with that?
Mr. GRONNINGSATER. Which language is that?
Mr. BICKWIT. Well, I am looking at 1.102-20B, 1 and 2.
Mr. GRONNINGSATER. That is the present regulations, yes.
Mr. BICKWIT. That is the regulation that was applied in the Con-
sumer's Power case.
Mr. GRONNINUSATER. Well, I don't know that I would agree with
that. But this-
Mr. BIoIcwIT. I can read it.
Mr. GR0NNINGSATER. Yes, I have it right in front of me.
Mr. BIcIcsvIT. No, but I can read the reference of the court to that
regulation which means to me that that was the regulation they
applied.
Mr. GR0NNINGsATER. OK, if this is B2, and regulation 20, it refers
to influence, says, "Expenditures for the promotion or defeat of legis-
lation included but shall not be limited to expenditures for the pur-
pose of attempting to influence members of a le.oislative body directly,
which is not involved here, or indirectly by urging or encouraging the
public to contact such members for the purpose of proposing support-
ing or opposing legislation." There is part of your emphasis on contact-
ing your legislator.
Mr. BICKWIT. Yes, but that obviously is a nonexchisive example.
The words, "but shall not be limited to," are there as plain as can be.
Mr. GRONNINGSATFR. Yes. But all the examples given in these reg-
ul ations involve contacting your legislator.
Mr. BICKWIT. That's right, but every example is qualified by the
words, "but shall not be limited to."
Mr. GRONNINGSATER. Well, reasonable men can differ.
PAGENO="0086"
120
Mr. BloKwrr. On the meaning of the words, "but shall not be limited
to"?
Mr. GRONNINGSATER. No, not on that. On the thrust of the present
regulations.
Mr. BICKwIT. Well, the only point that the staff would want to make
is that the Co~umer's Power Co7mpany case which applied this regu-
lation, in the view of the staff, stands for the proposition that you
needn't contact your legislator, you needn't urge that legislators be
contacted in order for the ad to be declared nondeductible, in that
under the facts of that case, many of the ads disallowed did not so urge
the readers.
And I would agree with you that reasonable men might differ on the
meaning of the statute and the. regulations. But I have difficulty agree-
ing with your proposition that after the Con~vimer's Power Company
case that reasonable men might differ on this.
Mr. GRONNINGSATER. Well, we are dealing now with a set of regula-
tions which covers both years before 1963 and years after 1962. And
when you look at years after 1962, 1 think you have to look at the
regulations as a whole.
Obviously-
Mr. BIOKwIT. Excuse me.
Mr. GRONNINGSATER. Those who testified in the May 6 hearing also
felt in doubt about the situation. Most of~ the thrust of what they said
was that rules should be changed, the Treasury should go back to its
old regulations. And there might be come question whether they could
under the new legislation. But they talked a great deal about what
they thought the rules should be and not what they are.
Mr. BI0KwIT. But in their testimony as to what they were, it was
the conclusion of the witnesses that your ads should be classified as
nondeductible. And as I understood their testimony they based it in
large part on the Consumer's Power case which in the opinion of the
staff does appear to be applicable to situations such as yours.
Mr. GRONNINGS~TER. Well, I don't know how important this is. But
one of the factors in the Consumer's Power case was that the court,
and this was a sixth circuit opinion, was that the-that there had been
a factfinding by the lower court and the circuit court felt that it didn't
want to disturb, it indicated some doubt in the matter, but did not want
to overrule the finder of the facts.
Mr. BIcKwIT. That's right, but the finder of fact must have said,
"You don't have to say, `Write your Congressman,' in order for this
ad to be declared nondeductible." And I have heard no cases on the
other side for the proposition that you do have to say, "Write your
Congressman~" in. order for an ad to be declared nondeductible.
Perhaps we ought to leave, it at that.
Mr. GRONNINGSATER. OK.
Mr. BI0KwIT. You mention that you have reconsidered the matter
of the ads in question for FPC a.ccounting purposes.
Can you tell us what factors account for your not having reconsid-
ered their tax treatment, also?
Mr. DOWD. WeJI, I think-first let me explain the basic factor with
respect to the accounting treatment that we propose to report to these
expenditures. It is basically to avoid an element of controversy that we
think is very peripheral. We don't want them to cloud the b~i~ meg-
sage that we are trying to convey here.
PAGENO="0087"
121
Now, it was our feeling that the language under the Internal Reve-
nue Code and the applicable regulations was more liberal than the
language in the FPC's, the Uniform System of Accounts. This also is
a factor.
I might mention one other thing. As I say, neither accounting for
these expenditures nor their deductibility for tax purposes was really
a factor or a consideration in the program. If they are all charged be-
low the line, if they are all nondeductible, we would have gone for-
ward with this program in any event.
I might mention one factor. Maybe Mr. G'ronningsater could clarify
it a little bit. But as far as a nondeductibility for tax purposes for
these ads is concerned, whether they are deductible or not, it is almost
a moot question.
Last year the American Electric Power system did not pay Federal
income taxes, and that particular `situation is at least a possibility or
a probability this year.
And Mr. Gronningsater could elaborate on the reasons for that.
But whether we deduct them or not is really small potatoes in the
whole context here of what we are trying to accomplish.
Mr. BlcKwrr. Did Mr. Gronningsater want to elaborate?
Mr. GRONNING5ATER. Only to the extent of emphasizing once again
that tax deductibility was not a consideration in this program at all.
The first time it was brought to my attention was after the-the first
time I heard of it was after the May 6 hearing when we received a tele-
phone call from a magazine about this matter. I then investigated
around the company and found that this subject hadn't been raised
with anybody concerning the taxes.
Mr. BIcKwrr. I would like to close with one final observation. That
is your view that the ad was in the public interest or conceived by
the company running it to be in the public interest, then under all
`circumstances, unless you urge your Congressman, it will be deducti-
ble, it does strike the `staff that there would be very little left of the tax
law in question given that, as I read the companies in question, vir-
tually all of them regard that their ads are in fact in the public
interest.
Do you react at all to that? Do you have a reaction to that?
Mr. GR0NNINGsATEn. Yes, I would have a reaction. I have read these
ads-I haven't read all the hundred ads mentioned in the testimony,
but I have read `some of them and personally have the feeling that
those involved were trying to carry ou't their duties and responsibil-
ities. Those, the various advertisers, were trying to lay facts before the
public and trying to carry out their duties and responsibilities. And,
if Mr. F'ant is correct, that the cost is deductible, if there isn't a con-
flict of interest between the advertiser and the public, why, then, and
I don't say that he is necessarily, but if these ads are all in the interest
of the public and Mr. Fant is correct, then the cost should be deductible.
Mr. BlcKwrr. Again for the record, as I understood Mr. Fant, he
referred to an identifiable `segment of the public. He was not explicit
on how you identify a segment of the public, but as I understood him,
his view was that if there were a number of interests that reacted
adversely to the advertisement, that there would be the needed conflict
of interest.
Mr. GR0NNINU5ATER. Well, I believe-I would suppose Mr. Fant
got into that in connection with the statutory language, any attempt
to influence the general public or segments thereof.
PAGENO="0088"
122
Now, I don't believe there is any definition of segments thereof. I
don't recall Mr. Fant-
Mc. Bicuwrr. There is no definition of selfish interest, et cetera.
Mr. GROXNINGSATER. Well, you get into a question of fact as you do
on so many tax things.
Mr. BIcuwIT. That is true. The one case we have that resolves those
facts based on the regulations applicable to your situation seems in my
view to have been resolved in contrary to your interest.
Thank you. very much.
Mr. DOWD. Mr. Bickwit, I would only point out one further thing.
That is as t.o 11 of our ads they made no reference to legislation. Not
only did they not ask the public to take any specific action, but they
made no reference whatsoever to legislation. And our position with
respect to those ads is that they are clearly deductible for action pur-
poses.
The area that is muddy in our view is the one where we do make
reference to specific legislation, but we do not ask the public to take
any action whatsoever.
We feel there is a difference of opinion as to that one under the
regulations and under the law. You may disagree, and Mr. Fant may
disagree. And the IRS may very well disagree, but that remains to be
seen if the issue is actually put to them.
Mr. BIGKWIT. And I should add that this disagreement comes from
someone who is not a tax attorney and has had very little experience
with the tax court.
Senator HART. How or under what procedures does the IRS under-
take to audit an issue such as this? Is there any, perhaps I should
know, is there some established method?
Mr. GRONNINGSATER. This is true of most large corporations; we
are under continual audit, in effect. And the audit is very thorough,
and well, let me say that I am in the legal department of our company.
We have a separate tax department. And the audit is carried on with
the tax department and the head of the tax department. But I have
spoken to him about this, and he told me that our advertising all the
time, apart from this new program, is ve.ry carefully scrutinized.
Senator HART. Scrutinized by the tax department of the com-
pany~
Mr. GRONNINGSATER. No, scrutinized by the Internal Revenue Serv-
ice on audit. In the audit of any one group of years, taxable years, it
takes years, it is a very thorough, lengthy audit.
Senator HART. Gentlemen, thank you very much.
Mr. DOWD. Thank you, Senator.
[The exhibit follows:]
ExHIBIT A
DErnjcTIBILIrY OF ADVERTISING EXPENSES FOR FEDERAL INCOME T~&x PTJRPOSES
Whether the cost of non-product advertisements is deductible for federal
income tax purposes depends upon the content of the particular ad. This is im-
plicit in much of the testimony at the May 6, 1974 hearing before the Snbcom-
nilttee on the Environment of the Senate Commerce Committee.
Prior to 1962 there was no legislation on the subject. All of the court decisions
on the point cited at the May 6 hearing dealt with taxable years governed by the
Internal Revenue Code of 1939, and relied on broadly worded regulations. Similar
language of broad scope was contained in the original regulations under the
Internal Revenue Code of 1954.
PAGENO="0089"
123
Congress legislated on this matter for the first time in 1962. The Revenue Act
of 1962 added Section 162(e) to the Code, applicable to taxable years beginning
after December 31, 1962.
The 1962 provision was liberalizing legislation. Paragraph (1) of Section 162(e)
permits the deduction as ordinary and necessary business expenses of, among
other expenditures, costs incurred in connection with legislative appearances,
expenses which previously were nondeductible.
Paragraph (2) of Section 162(e) provides that paragraph (1) "shall not be con-
~strued as allowing the deduction of any amount paid or incurred * * * in con-
nection with any attempt to influence the general public, or segments thereof,
with respect to legislative matters, elections, or referendums" (emphasis sup-
plied). It may be of some significance that paragraph (2) does not say in so many
words that the cost of attempting to influence the public with respect to legislative
matters is not deductible. Sections of the Code which disallow deductions typically
state explicitly that "no deduction shall be allowed" for certain amounts or
expenses; see, for example, Sections 261 through 279, "Items Not Deductible".
In 1965 the Treasury Department adopted regulations under new Section 162(e).
These new regulations under the liberalizing statute do not go so far in the
direction of denying deductibility as did the old regulations. In his May 6
testimony Mr. Harvey J. Shulman of Media Access Project, after proposing that
there be changes in the present statutory and administrative provisions to narrow
the field of deductibility, stated (page 48 of the transcript)
`As I have previously indicated, pre-1965 IRS regulations appear to have taken
a broader view in favor of non-deductibility. Specifically, expenses associated
with `the exploitation of propaganda' were not to be deductible. * * *"
The regulation under Section 162(e) of the Code is Reg. § 1.162-20. Paragraph
(c) of that regulation is captioned "Taxable years beginning after December 31,
1962". The pertinent part of paragraph (c) (1) is as follows:
* * All other expenditures for lobbying purposes, for the promotion or
defeat of legislation (see paragraph (b) (2) of this section), for political cam-
paign purposes * * * or for carrying on propaganda (including advertising)
relating to any of the foregoing purposes are not deductible from gross income
for such taxable years. * * *" (Emphasis supplied)
Paragraph (d) (2), which is referred to in paragraph (c) (1), reads as follows:
"(2) Enpenditures for promotion or defeat of k~gislation. For purposes of this
paragraph. expenditures for the promotion or the defeat of legislation include,
but shall not be limited to, expenditures for the purpose of attempting to-
(i) Influence members of a legislative body directly, or indirectly by
urging or encouraging the public to contact such members for the purpose
of proposing, supporting, or opposing legislation, or
(ii) Influence the public to approve or reject a measure in a referendum,
initiative, vote on a constitutional amendment, or similar procedure."
The only other language in the regulations dealing with Section 162(e) (2)
of the Code is paragraph (c) (4). It reads as follows:
"(4) Limitations. No deduction shall be allowed under section 162 (a) or any
amount paid or incurred (whether by way of contribution, gift, or otherwise) in
connection with any attempt to influence the general public, or segments thereof,
with respect to legislative matters, elections, or referendums. For example, no
deduction shall be allowed for any expenses incurred in connection with `grass-
root' campaigns or any other attempts to urge or encourage the public to contact
members of a legislative body for the purpose of proposing, supporting, or op-
posing legislation." (Emphasis supplied)
~\Te are not here concerned, as was the Supreme Court in the Cammarano case
cited to this Subcommittee in the May 6 testimony, with a matter on which
the general public is to vote.
There has been no court decision under the liberalizing 1962 legislation which
is helpful in determining the deductibility of the cost of advertisments such
as those which have been the subject of these hearings. Our guidelines are
therefore limited to the language of the statute and the new regulation there-
under.
This regulation, in denying deductibility in some instances, places very con-
siderable emphasis in paragraphs (b) (2) (i) and (c) (4) on urging and en-
couraging the public to contact members of a legislative body for the purpose
of proposing, supporting or opposing legislation. The regulation, in paragraph
(a) (2), allows deductions for "expenditures for advertising which presents
view-s on economic, financial, social, or other subjects of a general nature, but
PAGENO="0090"
124
which does not involve any of the activities specified in paragraph (b) or (c)
of this section for which a deduction is not allowable".
American Electric Power System ads fall into three categories:
1. `Some of the ads inform the public on certain problems connected with the
energy shortage and are concerned with assuring an adequate and reliable supply
of electricity. Companies which are subject to regulation are not permitted to
cease rendering service, or to limit their services, unless permitted by the
regulatory agency or by legislation. Specifically, electric utilities have the duty
and responsibility of providing reliable and adequate electric service at reason-
able cost. We believe it is clear that these ads, which neither ask the reader to
contact a legislator nor make any specific reference to legislation, are deductible.
2. Some of the ads, in addition to making certain other points, state that the
Clean Air Act should be amended if the American Electric Power System and
the industry as a whole are to be able to furnish the adequate and reliable serv-
ice which it is their duty to provide. These ads pursue what we view as an
educational program to that end. The readers are not urged to contact their leg-
islators, or to take any kind of action at all. The ads merely lay the facts before
them. We believe that under the 1962 legislation and the new regulations, un-
deniably more liberal than the old regulations, the costs of these ads are
deductible.
3. One ad we have published, urging the necessity to burn coal (of which
we have ample reserves) instead of oil or gas (which are in short supply),
requests the reader who agrees to send the ad to his `Congressman. Even though
no legislation of any kind is mentioned, we do not intend to claim a tax deduction
for the cost of this ad.
In summary, we i~elieve that the costs of all the ads we have published, with
the possible exception of the ad referred to in 3 above, are deductible as ordinary
and necessary business expenses.
July 18, 1974.
Senator HART. Next is Mr. E. F. Loveland, vice president of `Shell
`Oil Co. Mr. Loveland.
STATEMENT OP E. P. LOVELAND, VICE PRESIDENT, MARKETING-
COMMERCIAL SALES, SHELL OIL CO.
Mr. LOVELAND. Senator, thank you very much. My name is Gene
Loveland, vice president of marketing-commercial sales.
I appreciate very much the opportunity to be here on behalf of my,
company to express our views on this topic.
We have already outlined in written communications to the sub-
committee chairman the position Shell intends to take regarding the
tax status of the two 1974 advertisements which are questioned in your
study. Rather than repeat t:hose statements, which explain why we
consider the advertisements to be tax deductible, I wish to comment
`today on what Shell believes is really `at stake in any investigation of
this subject.
First, we recognize that the current regulations take the position
that no advertising is tax deductible if it attempts to influence the
public with respect to legislation.
On one point, we `agree with those who testified earlier before this
stibcommittee. We, too, believe that generally there has been an im-
balance in the news and information available to the American public
in the mass media today.
But the imbalance tilted not in favor of business, but rather
agamst it.
It is indeed a sad state of affairs when business finds it necessary t~
resort to advertising `to clarify important issues affecting its activities.
Advertising is one of the least effective ways of `doing this particular
job.
PAGENO="0091"
125
Comments printed in editorial columns and aired on daily news
programs are far more effective. Lacking ready access to these high-
impact media, we chose to publish the two advertisements in question
simply because our critics had been eminently successful in using both
the print and electronic media to present their views of our profits to
the public. Our advertisements thus were essentially a defensive move
designed only to properly balance the perspective on the subject. And
their exposure, when compared with the printing ink and air time re-
ceived by our critics, amounted to a bb shot in response to a salvo.
That `situation was not unique.
Even today, if both Ralph Nader and a businessman were to `hold
press conferences in Washington on the same subject, whose comments
would predominate in the pages of tomorrow's newspapers and in
tonight's newscasts? Critics of business, such `as Mr. Nader, have little
trouble in getting their views `before the public. They don't have to
advertise because their views are publicized free.
The businessman would have trouble even getting a reporter to
cover his press conference.
We do not question Mr. Nader's right to speak out or the press' right
to cover and publish his views. We are only saying that it has been
difficult to get all the relevant tacts `about business published today.
Also, let me make it clear that I `am not singling out Mr. Nader.
However, his statements `are representative of the criticism leveled at
business these days. I have brought along a few articles clipped from
our daily newspapers as examples of what I mean. In the interest of
time, I shall read only a few of the headlines. They represent the gist
of the news that was spread across America in January, when our
ads were published.
"Nader charges energy scare designed to double oil prices."
"Aspin claims oil companies gouging public."
"Senator claims oil shortage put-up job."
"Jackson says oil firms irk public with evasions."
Often, `antibusiness, antiprofit system messages are run on the air
free of charge. With your indulgence and permission, I would like to
play a tape recording of such a message that was sent to over 400 radio
stations across the Nation by a group called Public Interest
Communications.
Senator HART. Yes, do.
Mr. LOVELAND. If this won't come through, I will try to read it.
[The taped material played is as follows:]
HosT. Welcome to Highway Robbery. The game where giants of industry see
just how much they can get away with.
ANNOUNCER. Thanks, Bob. Our first contestant today is Mr. Robert Baron,
President of the Windfall Oil Company.
BARON. Howdy.
ANNOUNCER. On our last show Mr. Baron got away with the Alaska Pipeline,
the oil depletion allowance, numerous anti-trust exemptions, astronomical price
increases and record profits.
HosT. Well, that's quite a haul, Bob! Well, Mr. Baron, what would you like
to get away with today?
BARON. Total control of the world's resources, Bob.
HosT. Total control of the world's resources! How about that! And just how
1o you intend to get away with that, Mr. Baron?
BARON. Well, Bob, I thought I'd sorta stop pumping my old wells and make the
public pay to* get me a whole bunch of new ones. I'll just tell `em no money, no
oil, know what I mean?
PAGENO="0092"
126
HosT. Oh, ho, sure do. Mr. Baron. Well, Bob, he wants to control the world's
resources.
ANNOUNCER. That's right, Bob. Let's see if our audience will let him get away
with Highway Robbery!
Senator HART. That is tough.
Mr. LOVELAND. I thank you for your indulgence, but I just wanted
you to know how someone like us feels when something like this goes
out across the Nation.
Senator HART. Out of curiosity, do you have any idea how many
stations picked that up?
Mr. LovEI~m. Our first alert on this was our own employees who
called in from various parts of the Nation. And we do have an or-
ganization that does media research, a California-based audio-video
reporting service, who told us it did go to 400 stations. How many
played that, I frankly don't know. But it got pretty good coverage
because our people were a little disturbed about it.
This message was not only aired free of charge, but also was
funded by contributions which then could be deducted from income
taxes since Public Interest Communications is a nonprofit organiza-
tion. Thus, this message was free of any tax charges.
Is it any wonder that in such circumstances business has turned
to advertising in an attempt to tell its story? At times, it seems to be
the only way a business has to express its point of view on subjects
important to its future,
The American people have nothing to fear from this kind of adver-
tising. In fact, they stand to gain by it. The average citizen is sensi-
ble enough to know when he is being sold a bill of goods. But this
holds true only if he has the opportunity to consider all sides of the
important issues of the day.
In our view, our laws should encourage the free exchange of ideas.
Our concern should be not how to further limit the access of busi-
ness or anyone else to the mass media but rather how to make the
mass media more available for the free exchange of information and
ideas so vital to the functioning of a democracy.
Why should the people who oppose the ideas of business have the
opportunity to express their views free, while more often than not,
business must pay for the same right? If the tax deduction for insti-
tutional or goodwill advertising is denied to energy-related companies~
would we not then be forced to pay nearly a double penalty for the
right to free speech and the use of a free press?
One of the issues that precipitated the American Revolution was
the Stamp Act. It would have greatly increased the cost of newsprint
in the colonies and thereby made the cost of expressing ideas almost
prohibitive. The issue facing us today i~s little different. We should
not levy an economic penalty on the business community for express-
ing its views.
It seems to us that opponents of business are now asking you to
penalize business for expressing its views or else to find some way
of limiting what it can say in the mass media.
Here, it is appropriate to express another concern. Trying to de-
fine what is propaganda and what isn't, what should be said and
what should not be permitted, is a difficult matter fraught with
risk.
PAGENO="0093"
127
You are being asked to consider ways to limit what business can
say in tax deductible advertising. This is the same old problem
censors face everywhere: Where do you draw the line? Who will be
affected by today's decisions, tomorrow? How do you define what is
proper `and what is not?
In our textbooks, the `only historical guide that had any merit was
the prohibition on obscenity, and today even obscenity is proving
difficult to define.
In closing let me say that recently, we have been more successful in
getting our views across in the mass media-without resorting to the
kind of advertising being studied by this subcommittee. The media
are being more evenhanded as they gain insight into the complexities
of the energy problem.
We do hope, however, that no one has been lulled into complacency
regarding the energy problem confronting this Nation. It is a serious
problem and one that will be with us for some years to come. Thus,
it is conceivable that from time to time we at Shell may again find it
`necessary to advertise to make the facts of the situation known to the
public. Although we do not believe that advertising is the best way
of getting our views on vital issues across to the public, we would not
ihesitate to use it again if there were no other way to do the job.
Shell endorses `t;he idea of an open society in which the ideas of all
people may be freely expressed, in which the public has access to the
information and facts it needs to have in a democratic society. Only
in this way is there any hope that balanced, sensible views will ulti-
mately prevail.
I thank you.
Senator HART. You `have heard me say earlier today, one part of
`the problem, and understandably it is not the one which you face, is
that this is an emotionally loaded matter, the impoverished good
idea. What can we do? Though the impression may not be very strong,
I recognize the desirability of permitting the strongest and the most
powerful among us-corporate or individuals-freedom to effectively
present their ideas. But how can we insure an effective presentation
by the least powerful `of their ideas, because `the balance sheet doesn't
determine who's got the better idea at all.
Mr. LOVELAND. Well, I wonder, Senator, if that is in fact a need. In
other words, you have mentioned the impoverished. We are talking
here about a climate of antibusiness that is using sensationalism to
bang away at them. And I don't know of any medi'a or any newspaper
ivho would take that tack relative to the impoverished. So I am not
sure that we can say that this situation does occur or would occur. If
they have a particular message `and it is of interest, I think we can
assume that the media in this case would pick it up, because this is
the nature of our country, to play up the little fellow, to-
Senator HART. I think that's an attitude those of us who are more
comfortably situated generally accept as valid. But if we were uncom-
fortably situated, I am sure we could cite to this committee, and Shell
Oil, a dozen groups, welfare mothers. Now recently they managed to
get a point of view across. But that is typical of a group. I am not sure
that given the limitations of time on television and the way you have to
put a newspaper together, that the advantage that comes from wealth
is not still significant in your ability to get ideas out.
PAGENO="0094"
128
Mr. LOVELAND. I think we have a unique situation here. We had a
particular moment in history where we have just waves of this sort of
a situation focusing in. And we attempted to push those back and even
the waters.
Senator HART. I agree that the roof seemed to fall in on you at that
particular point in history.
Mr. LOVELAND. Yes. I think as we had said earlier, we have got to
open this up. I think you have recognized today that your committee
is getting broader in this activity. And I think somewhere along the
lines we have to address ourselves to the media. Because here in our
estimation was a segment of our society who neglected their responsi-
bility and resorted to sensationalism which had to be counteracted.
Now maybe we should ask them, as I have many, many times, going
back to where I worked with young people, I used to wonder why it
was that the Eagle Scout and some of the other do-gooders and scholar-
ship boys hit the last page when the murderers and rapists were on the'
front page. And I asked that, why are these teenagers here? And
usually the answer is well, it sells papers, it creates circulation, it is a
better Nielsen rating.
I think these are the things we have to say, that they have a responsi-
bility to present the facts and they have a total responsibility to all
people. I think this is the area that we have to open up.
Senator HART. Well, narrowing it a little now, in your advertising
program, are you familiar with how Shell determines in the case of a
particular ad whether it is or isn't deductible?
Mr. LOVELAND. Well, in our advertising program, we have had two
forms of advertising. We have our product advertising, mainly out of
our marketing department, and we have had our institutiOnal out
of our public affairs area. We have never considered our type of institu-
tional advertisting in a tax situation or a tax problem. We do not
have, as in the case of Mobil, a long-term dedicated type of message
that they are on. Ours was an emergency situation, at the time we ran
four ads. We felt that these were public education ads and what they
should know. We talked about price and how the Cost of Living
Council established the price and why they were paying that price
at the service station. We talked about the allocation program. There
was tremendous confusion among people and all classes of customers
on how that allocation program sorted out and who had priorities
and who didn't, and so forth. We ran an ad which graphically.
described that. Then we ran the ad talking about our profits, and
then-which is one of the ads in question. And we ran another one
depicting our results and what those results meant. What they meant
in cash generation, the need for cash generation, how if this world
was going to continue to enjoy the measures of its energy and so
forth, that cash generation was a must.
And it didn't occur to us that we were involved in any legislation
or lobbying in any way. But we felt that because the media had'~
neglected their particluar responsibility, we had to tell the public'
where this oil was, what it was going to take to get this oil, and what
it would mean to them in the way of conservation and other items..
It is a public service.
Senator }Lu~T. Since then, have you taken a reading on the deducti-
bility or nondeductibility of any of those ads?
PAGENO="0095"
129
Mr. LOVELAND. No; we haven't. Well, I say we haven't with any tax-
ing body. Our own tax people are quite firm, as I have indicated in our
letter, quite firm on their position. And as far as a true reading, of
course, that will not occur until these are filed coming into next year.
Mr. BICKwIT. On the tape recording that you played, you say
that was sent to over 400 radio stations. Do you by any chance know
how many of those stations actually played the tape on the air free of
charge?
Mr. LOVELAND. No; I don't know whether we could find out. We
employed Audio-Video Reporting Services through a Mr. Erickson
of Monte Rio, Calif., to tell us how many of these were sent out.
And this is what he told us.
Now whether they have a reading, I can try to find out and report
to you, whether they have a reading on actual airing of that.
Mr. BIOKwIT. It would be useful for the record.
Mr. LOVELAND. We will send you that if we have it.
[The following information was subsequently received f9r the
record:]
SHELL `OIL Co.,
Washington, D.C., August 19, 1974.
Hon. PHILIP A. HART,
Chairman, Subcommittee on the Environment, Senate Commerce Committee.
Dirksen Senate Office Building, Washington, D.C.
Di~ian \SENATOR HAaT: The following response has been provided to me by `Shell's
Head Office in Houston in reply to your inquiry of July 18, 1974, at the Commit-
tee on Commerce, Subcommittee on the Environment, hearings on Corporate
Energy and Environmental Advertising.
We refer to the Transcript of Proceedings of July 18, 1974, in which Mr. Bickwit
of your staff requested available information on the actual airing of the "High-
way Robber" radio tape. We can confirm at least that the following stations aired
this tape:
KSFO-San Francisco, Calif.
KFRC-San Francisco, Calif.
WAB'B-Mobile, Ala.
KPFT-Houston, Tex.
Our own employees reported the above stations to us `and, undoubtedly, other
stations used the tape, but we have no way of knowing this.
Sincerely,
J. CARTER PERKINS,
Vice President.
Mr. BI0KwIT. This is a question that you may have some difficulty
with, but I feel it~is appropriate to ask. In your view, would a company
run ads like the ones in question, even if in your view they were
nondeductible?
Mr. LOVELAND. I think they would. I don't think that was the ques-
tion. The point was, here was a void, and that void had to be filled.
If we have to pay for that expense, it would be worth the money. We
think it is a matter of principle and not a matter of dollars.
Mr. BI0KwIT. In the advertisement entitled, "How in all conscience
can anyone call these excess profits ?"is it your intent in that ad to
influence the public?
Mr. LOVELAND. Well, maybe we have a matter of semantics. You are
talking about influence and we are talking about education. We are
talking about `bringing to the public the facts, and the facts are that
this is our profit picture, this is how we attained it and this is why we
need it.
PAGENO="0096"
130
Mr. BICKWIT. Do you think influence is an improper character-
ization?
Mr. LOVELAND. Well, influencing legislation because we were not
involved in legislation, I would say influence might be stronger than
we felt. We felt it is educational. I think the end of our ad says all we
ask is that the Government and the public approach the subject with
objectivity and a minimum preconceived-of preconceived notions.
After all, we have basically the same ends in mind, that is, providing
for the needs of the American consumer as well and as fully as pos-
sible. And these are the educational facts to back that up.
Mr. BICKwIT. ~\`ell, I wouldn't go on in semantics except that it is
relevant to the tax matter. But when you have got a camapign for an
election, you have got two people running against each other and some
people support one guy and some people support the other guy. If you
go out and give to the public facts with respect to why a particular one
of those is better, it strikes me that education is perhaps not nearly
as good a characterization of what you are doing as influence.
Mr. LOVELAND. But you are saying influence. And I would have to
say influence what or for what reason? Ours was not a matter of in-
fluence. We found ourselves in a position in an energy crisis with in-
formation about the energy crisis antioil up here and facts about it
down [indicating]. So I am saying we needed to educate the people
and bring the true facts to them and bring that up here. Now if we go
beyond this point and we are trying to peddle some fish, for a par-
ticular situation or a particular bill, then we are influencing. But when
you bring the people up to a knowledgeable level of understanding of
the oil business, which is as I must say, a most difficult job, then to me
that is education.
Mr. BICKwIT. So it is the reference to legislation which in your
view decides the question of whether there is-
Mr. LOVELAND. Reference to education and influence. I can't under-
stand what we are trying to influence. We are not trying to influence
anything, we are trying to educate the people in the very facts of the
case. And the facts are, this is the money we made. This is the money
that we would have made had there not been inflation. This is the need.
And this is what is going to bring you more oil.
Mr. BTcicwIT. The problem is that those who perceive those facts
entirely different from you-and there are many that do-have diffi-
culty characterizing your role as that of an educator~ just as that guy
who wants to vote for President Nixon has difficulty, conceiving that
the guy who is out campaigning for McGovern is educating.
Mr. LOVELAND. I am sure. we are equally admant in our particular
positions and probably another forum will resolve it.
Mr. BICKWIT. Again, as was pointed out with the last witness, if
your understanding of what is educational, as opposed to influential,
were accepted, it is very difficult to see what remains of the law which
says that you may not deduct when you are influencing the public with
resnect. to legislation.
Given that, any one who confronted the question of whether he was
so doing could, under the way you define the term education, resolve
it in favor of the fact that he was educating' rather than influencing.
Mr. LOVELAND. Well, I have to start with a point that it would
anpear that certainly the media had an almost zero knowledge of the
oil industry. If they didn't have a zero knowledge, then they didn't
PAGENO="0097"
131
report it very well. So I start from that point that I have an uneducated
public and I have an uneducated media, and therefore, I have to put
the facts before them. They prefer not to put the facts there, so we
put the facts there. Those are facts. Now, I don't consider them in-
fluence.
Mr. BI0KwIT. You don't consider that educating the public with
respect to the nondesirability of certain legislation is in any way
trying to influence the public with respect to that legislation?
Mr. LOVELAND. I am talking about these two ads and I am talking
about the situation. And I don't know about the noninfluence of legis-
lation. I am not aware of any legislation.
Mr. BI0KwIT. There was legislation referred to in the excess profits
ad.
Mr. LOVELAND. Well, that is only to establish the entire ad in posi-
tioning, and let them know in total what is going on and is, I feel-
comes under the category of facts.
Mr. BI0KwIT. Again, if we view it that way, Congress may well have
legislated a nonlaw.
Thank you very much.
Mr. LOVELAND. Thank you.
Senator HART. The exchange was very interesting. I don't want to
acknowledge that Congress has legislated a nonlaw. But I do acknowl-
edge that education by itself, from its Latin derivation suggests
influence.
Mr. LOVELAND. Once the man puts the education into practice.
Senator HART. More influence than it is education. As far as the
semantics go, I think we ought to acknowledge that the root derivation
of the word education is really influence, to lead.
Mr. LOVELAND. Well I-
Senator HART. Yet I fall back, having said that, that there are iden-
tifiable situations where it is more to influence than to inform.
Mr. LOVELAND. I just have to say that we had a bad situation of
ignorance prevailing in this country relative to the oil industry. And
we felt facts were necessary because one segment did not give them
in sufficient quantity to satisfy, let's say, the education of these people.
And, therefore, we attempted to fill that void and lay out the facts.
Senator HART. Thank you very much.
Mr. LOVELAND. Thank you, Senator.
[The articles referred to follow:]
[Daily Times News, Mt. Pleasant, JTan. 30, 1974]
NADER CHARGES ET~ERGY SCARE DESIGNED To DOUBLE OIL PRICES
(By Dick Westlund, News Editor)
The energy crisis is a fabrication of the oil industry, created to double the price
of petroleum products, according to consumer advocate Ralph Nader.
Speaking before 8,000 people at Rose Center Arena last night, Nader indicted
the federal government and energy czar William Simon for pursuing policies
harmful to the public interest.
"The data that have come out in recent weeks show there are adequate fuel
supplies," charged Nader. "The question is if they are being allocated fairly."
He also said that the major oil companies are driving out independent retail
distributors, pressuring the government to remove pollution controls and grant
tax incentives and moving in on oil lands owned by the United States.
"How could they pull this off?" he asked. "They are exploiting a massive gap
in the citizenship."
42-367-75----7
PAGENO="0098"
132
To stop this trend, Nader applauded the work of consumer groups such as the
Public Interest Research Group in Michigan (PIRGIM). He said that the way to
regain control over business conglomerates is through citizen action, not bureau-
cratic regulation.
Nader received half a dozen bursts of applause for his attacks on Simon and
major oil companies.
"Washington plays Charlie McCarthy to the oil companies," he said.
Citing Atomic Energy reports on nuclear power, Nader said that it would be
"technologically suicidal" to rely on nuclear power as a prime source of energy,
as suggested by President Nixon.
"They are fragile nuclear baskets that could bring catastrophic risks to this
and future generations," he emphasized in a press conference before the speech.
Although the danger of an explosion is small, `he said, the danger of a break-
down in the cooling system, with resulting melting of the nuclear core, could
cause release of radioactive fallout throughout an area the size of Pennsylvania.
"Consumers has had serious problems in design `and operating deficiencies (in
Michigan)," he charged.
Nader said `that the public interest research groups and groups of his student
"raiders" would `be focusing on nuclear plants.
"We have all got to face up to the nuclear plant situation" he stated. "Do we
want to live next to these kinds of plants ?"
What is the cure for the energy shortage?
First, eliminate the 30 to 40 percent of wasted energy in our society. He said
most industrial and commercial plants can and are cutting consumption by 15
to 25 percent just by applying measures of thrift.
In the long run, Nader sees solar energy as being the chief source of electrical
energy.
"Why not use the sun? Farmers use it all the time," he commented.
Nader stressed that solar energy programs have not `been developed because
it is provided free. He said that `the U.S. government has spent $20 million on
solar energy research, compared to $80 billion for the moon program.
"One of the greatest ironies of modern society is that we have put on the shelf
terrific ideas for quick, easy energy (from the sun) ," Nader added.
`Appearing angry at government actions in favor of the oil industry, Nader
called for support of a bill to create a federal energy company, along the model
of the Tennessee Valley Authority (TVA).
Such a company would provide independent information to the government,
serve as a spur to competition with private companies and assure an emergency
supply of petroleum.
Such a move would by-pass superficial questions of rationing or granting in-
centives to private companies, and establish a solid base for citizen involvement,
according to Nader.
In this way the nation could be self-sufficient in energy by 1980.
Pollution controls and environmental safeguards are vital to energy develop-
ment, stated Nader. Gas emission controls should be strengthened and produc-
tion of Alaskan and Gulf of Mexico oil fields should be safeguarded.
"If little Honda can produce an engine that meets governmental standards, it
seems difficult to imagine that a company like Gene'ral Motors can't," he said
in response to a question.
AsPIN CLAIMS ODL COMPANIES GouGING PUBLIC
(Post Washington Bureau)
WASHINGTON-Rep. Les Aspin, D-Wis., charged Wednesday night that major
oil companies are using their "monopoly power to gouge the consumer" on
fuel oil and gasoline prices.
Aspin, one of Congress' strongest critics of the oil industry, asked the Ameri-
can Petroleum Institute (API) why fuel oil costs are zooming upward at a time
when supplies are higher than last year and demand is relatively unchanged.
Fuel oil supplies, used to heat homes in the East and Midwest, are 28.5 per
cent higher now than a year ago, the congressman claimed, and demand is up
by only 5.4 per cent. Despite that, he said, API and Labor Department statistics
show retail prices climbed by 30 per cent in the first 11 months of 1973.
"The oil companies are taking advantage of the psychology of a fear of shortage
to price gouge," Aspin charged.
PAGENO="0099"
133
If petroleum was really a "free market" industry where prices were set by
demand, he claimed, fuel oil prices should be going down-not up.
"The fact is," Aspin said, "that the oil industry is basically monopolistic and
is holding back and hoarding products to increase profits."
He said gasoline supplies-based on API and Labor Department figures-
are 2 per cent lower than a year ago, with demand up by 4 per cent.
Under those circumstances, a "slight" increase in pump prices would be under-
standable, Aspin said. But gasoline costs are "going through the ceiling," he
complained, and are "totally unjustified."
[Lansing, Mich., State Journal, Jan. 25, 1974]
SENATOB CLAIMS OIL SHORTAGE Pup-lIp JOB
(By Lee Hickling, Gannett News `Service)
`WASHINGTON.-Sen. Frank `E. Moss thinks he has found out why there was a
fuel shortage in the Plains states last winter. He says it was a put-up job.
`The Utah Democrat also believes what he says be learned about last winter's
shortages has taught him to ask the right questions to `find out whether this win-
ter's fuel shortage scare is real.
Moss says he and his staff found `out that, while residents of his state and of the
Northern Plains were shivering through on a short supply of fuel oil, there were
millions of `barrels of oil piling up in tanks along a'pipeline from Texas to New
York City.
Moss doesn't think it happened by mistake. He `thinks it was deliberately done
for two reasons-to get higher pri'ces traditionally paid in the Middle Atlantic and
Northeastern states, instead of the lower price-controlled rates in the Plains, and
secondarily, to beef up the big oil companies' case for raising prices on their prod-
ucts as a means of preventing shortages.
What `he found out, Moss feels, forms a nearly-perfect example of the way `big,
vertically-integrated oil companies misuse their power over petroleum from the
wellhead to the consumer.
There is a major pipeline from the oil fields of Texas and Louisiana, past
Atlanta, Washington, D.C. and Philadelphia, to New Jersey and New York City.
It is owned `by the `Colonial Pipeline Co., which in turn is owned by 10 big oil
companies-Texaco, Cities Service, Gulf, `Standard Oil of Indiana (American),
Mobil, BP, Continental, Phillips, Union and Atlantic-Richfield (Arco). It is a
principal carrier of oil products from Gulf Coast refineries to the populous middle
and upper East Coast.
`In the winter of 1970-71, the refineries moved 79.7 million barrels of Number 2
`heating oil through Colonial to market. In 1971-72, it was 83 million barrels, a
4 per cent increase, which was, Moss said, a reasonable increase to expect.
If there had been another 4 per cent increase in 1972-73, Colonial would have
carried about 85.6 million barrels. Instead, it carried more than 98 million bar-
rels-so much that nearly two million of it never got to market `by April 30, 1973,
but remained undelivered in tanks along the way.
There is another big pipeline conecting with the same Gulf Coast refineries that
use Colonial, the Explorer Pipeline north past Tulsa and St. Louis to Chicago.
At Tulsa, Explorer connects with the Williams Brothers pipeline, a major ar-
tery for oil products to the Upper Plains states.
Moss' staff is still trying to nail clown the answer to one `big question: were
shipments over the `Williams Brothers pipeline and other routes to Upper Plaina
fuel oil markets cut by about the amount pumped in excess to tanks along the
Colonial pipe?
"We have heard from reliable industry sources," Moss said, "that deliveries.
from Explorer (to Williams Brothers at Tulsa) ran more than 20 per cent be-
low what was forecast by Explorer shippers no more than 12 months earlier.'~
Moss's consumer subcommittee of the Senate Interior Committee subpoenaed
figures.
Williams Brothers did not dare SU~~i~ them without a subpoena. for fear of
being sued by some of the major oil companies, a striking bit of evidence of the
majors' hammerlock on the U.S. oil market. They are still trying to make sense
out of the mass of data and see whether the reports Moss heard are confirmed.
More support for his claim that fuel was deliberately shunted from the Plains
to the middle and north Atlantic states is found, Moss says, in the production
records of refineries operated by a major oil company. Which one, he won't say,
PAGENO="0100"
134
because the information was given him with the understanding it was "pro-
prietory."
According to Moss, this company has several refineries, a big one on the Gulf
Coast and others serving the Plains states. But the latter plants, in the face of
last winter's regional shortage, did not do what they had done in previous years-
change over to produce larger quantities of fuel oil. In fact, they put 800,000
barrels of heating oil into storage tanks and never let it out to market.
Meanwhile the company's Gulf Coast plant increased its fuel output
"enormously," Moss said, by 3 million barrels over the previous winter. The fuel
was all shipped northeastward over the Colonial pipeline. "Even though the in-
crease in Gulf Coast production would have been adequate to supply the Plains
states," charges Moss, "very little, if any, of this fuel ever reached the Williams
Brothers pipeline, and thus never reached the Plains states."
Unless there was a plan agreed on by the major oil companies to withhold
oil from the Plains states. Moss wants to know, how could they all decide si-
multaneously to change their supply plans? If there were competition, one com-
pany would rush in to grab the market that another was neglecting, he says.
Moss admits that he doesn't have all the figures he needs to prove that the
shortage was phony. Most refiners and pipeline companies refused to answer
his subcommittee's questionnaires.
But he said the investigation is continuing, and meanwhile we have gained
"a glimpse of the phenomenal manipulations which have taken place in the oil
industry, manipulations due to the overwhelming power of vertical integration."
Another congressman who has been ahead of his colleagues in trying to under-
stand the operations of the vast, intricate network of interrelations that exist
between the major oil companies is Rep. George E. Brown, Jr., P-Calif. Brown
took a step almost without precedent for a Congressman last year-he filed a
brief with the Federal Power Commission against a request by two natural gas
producers and a gas pipeline to raise the price of gas from 26 to 46 cents per
thousand cubic feet.
Brown said the evidence is overwhelming that the price was not arrived at
the negotiation in a competitive market, but agreed on by "two subsidiaries of
the same corporate giant." This is the industry pattern, he said. To attempt to
prove his point, he filed a brief that unraveled some of the tangle of relationships
between one major firm, Texaco, and other oil and gas producers.
Texaco or its subsidiaries, Brown said, owns Louisiana oil leases jointly with
Exxon, Amoco, Shell, Mobil, Atlantic-Richfield, Chevron, Getty and Union Oil.
It has an interest in 55 offshore leases from the federal government, and 29 of
them are jointly held with Amoco (Standard Oil) of Indiana.
Abroad, Texaco is one of the four big partners in the Arabian-American Oil Co.,
with Exxon, Chevron (Standard Oil of California) and Mobil. Texaco and
Chevron jointly own Caltex, which produced $2.3 billion worth of oil in 1971.
Texaco is one of the major partners in Iranian Oil Participants, the "consortium"
that controls oil from the rich fields in Iran. Others are Mobil, Exxon, Chervon,
Gulf, BP, Shell, Atlantic, Signal and Getty.
Texaco and other major producers share ownership of many `big interstate pIpe-
lines, Brown went on: Texaco has 22 percent of Badger Pipeline, 5 percent of
Dixie, 34 percent of Laurel, 14 percent of `Colonial, 27 percent of Wolverine, 9 per-
cent of West Shore, 40 per cent of Wyco, and 45 percent of Texas-New Mexico.
When it comes to oil and gas wells, in the Permian Basin of Texas, Texaco
owns 42 jointly with Atlantic-Richfield, 23 with Cities Service, 19 with Conti-
nental, 25 with Getty, 23 with Gulf, 19 with Mobil, 18 with Shell, 22 with Phillips,
30 with Amoco, 22 with Exxon, 10 with Standard Oil of Ohio, 23 with Sun and 11
with Union Oil Co.. according to Brown's research.
"It can be `argued," the Californian conceded, "that there are good economic
reasons for the close economic interrelationship of oil and gas producers. There
is no question that substantial economic savings can be realized in joint ven-
tures . . . The problem. however, is that these substantial joint interests create
an atmosphere of close cooperation rather than competition. We have, in effect,
created a cartel."
JAcKsoN SAYS OIL Fin~rs IRK PUBLIC WiTH EVASIONS
(By Jack Cleland, Chronicle Washington Bureau)
WASHINGTON.-The Senate permanent investigations `subcommittee continued
its interrogation of seven major oil company executives today in an attempt to
find out if the fuel shortage is for real.
PAGENO="0101"
136
Subcommittee Chairman Henry Jackson, P-Wash., chided the officials Monday
for their reluctance to disclose current figures on earnings and stocks of crude oil
and refined petroleum products.
He said their less than responsive answers to the questions posed to them,
explains the public's general skepticism that the energy crisis is really a contriv-
ance to boost prices.
Jackson released a compilation of the companies' inventory stocks showing that
they had an increase of 5.5 percent of crude and products on hand at year-end 1973.
The oil company witnesses took the general position that the 1973 figures do not
reflect the tight world crude supply situation, aggravated by the Arab boycott.
Most of the officials were generally pessimistic about the crude supply situation,
even if Arab oil is released, citing the growing world demand for petroleum
products.
They warned against punative legislation or taxes against the petroleum In-
dustry which would be counter productive to the national goal of making this
nation self sufficient in energy.
In response to questions posed by Jackson, each or the officials denied his
respective company had a shut-in crude oil capacity it was keeping off the
market. They also denied allegations that their companies were keeping oil in
tankers offshore waiting for prices to rise even higher.
Jackson singled out Exxon Senior Vice President Roy Baze for the company's
refusal to furnish the subcommittee with information about service station
closings.
Exxon contended, in response to a subcommittee questionnaire, that this infor-
mation was proprietary. Jackson noted that the other six companies, Gulf. Mobil,
Shell, Standard of California, Standard of Indiana, and Texaco, all answered this
question.
Baze said Exxon had no objection to giving the subcommittee this information
on a confidential basis but was concerned about discussing it in front of its
competitors.
Jackson said Exxon's position was "incredible." "How can we get the facts
on this energy crisis if you mark the information proprietary?" he asked Baze.
"I'm not trying to be unfair," Jackson said. "But this is what outrages the
public."
Baze finally broke down and recited the figures sought by Jackson. He said of
the 12,084 Exxon stations owned or leased by the company since Jan. 1, 1973,
1268 closed but not for a lack of gasoline.
The questioning dealt with oil company profits for 1973 which were generally
higher than 1972, especially in the last quarter of last year.
Most of the oil company executives explained that 1972 was a poor year for
earnings and comparing 1973 to 1972 did not give an accurate picture of profit
trends.
Each executive denied his company w-as hoarding or stockpiling ~isoline at
abandoned stations.
They also denied having any knowledge of a black market in gasoline although
Baze said that under a mandatory allocation program, like the one now in effect,
the elements that breed a black market are there.
SENATOR SAYS OIL FIRMS KNEW CRISIS WAS COMING
SANTA FE, N.M. (A.P.)-TJ.S. Sen. Joseph M. Montoya, P-N.M., says major U.S.
oil companies knew an energy crisis was coming in 1970, but took no real steps
to protect the public.
In a speech prepared for a joint session of the New Mexico Legislature Thurs-
day, Montoya said as a result "the nation was unprepared" for the October Arab
oil embargo.
"In the three-year period the oil companies built no new U.S. refineries. They
continued to plan on filling an ever-larger proportion of U.S. needs with foreign
imports," Montoya said.
"One problem we all face is that most of the figures we must work with come
from the oil industry itself-no one, either in the administration or Congress-
can assure us about statistics," he said.
The senator said the United States imports a sixth of its oil now and by 1985
will import nearly half its needs.
Senator HART. Our next witness is Mr. Sam Black, Tax Analysts &
Advocates.
PAGENO="0102"
136
STATEMENT OP SAMUEL BLACK, TAX ANALYSTS & ADVOCATES
Mr. BLACK. Good morning, Senator.
Senator HART. You may proceed.
Mr. BLACK. Thank you.
For the record, my name is Samuel H. Black. I am a staff attorney
at the public interest law and research firm, Tax Analysts &
Advocates.
Senator, I don't have a prepared statement. I have an outline, which
I would like to insert into the record at the end of my testimony. I
would like to speak only briefly, and I will then be pleased to respond
to whatever questions the committee might have.
I appreciate the opportunity to be here, and appreciate the invitation
extended by the committee staff. I am here in part as a neutral party,
I think, neither representing a utility nor any of the public interest
groups that are involved in the media or broadcasting field.
Senator HART. Where does your money come from?
Mr. BLACK. Tax Analysts, as we call it, is supported by the sale
of publications. We have a weekly magazine. We sell other professional
publications to tax professionals. We also have foundation grants and
we have a national membership.
I want to make just a few points. I have read the transcript of the
earlier hearing and heard, of course, the presentations here this
morning.
I think that under the traditional way of looking at the corporation
income tax or our income tax in general in this country. that it would
be improper to characterize the deductible status of business advertis-
ing or business lobbying as a tax subsidy. Our corporation income tax
is a net, not a gross. income tax. And corporations are permitted-as
individuals are permitted-to deduct the costs of doing business as
they compute taxable income. If lobbying is seen as a cost of doing
business, as it is. for example, for the utility and oil company wit-
nesses who were here this morning, the costs are simply deductible
from their gross income. And the fact that it is deductible is not a tax
subsidy.
Similarly, with respect to advertising: advertising a product is
simply seen as a cost of doing business, and those costs are properly
deductible from gross income to reach taxable income.
I would assert, Senator, that if lobbying and advertising are directly
related to the generation of income, they should be deductible from
gross income in order to reach taxable income, and the deductibility
wouldn't be a subsidy. As you know, and as this hearing has pointed
out very well-unprecedentedly well-the revenue code does disallow
deductions for grassroots business lobbying, usually taking the form
of advertising. I would conclude, then, under the traditional way of
looking at our tax system, that this is a tax penalty for business
lobbying.
Now, contrast that situation, which I view as involving a tax penalty,
to the situation of public interest groups.
The charitable deduction and tax exemptions for charities are true
tax subsidies. They have little to do with the computation of net
income. Many charitable organizations are able to lobby and are able
to advertise, and they do so as beneficiaries of tax subsidies, so I would
PAGENO="0103"
137
argue that overall, the Congress has chosen to subsidize the lobbying
activities of charities more than it could be said that Congress may be
subsidizing the lobbying activities of business.
I prepared for today a very small chart pointing up one aspect of
this problem. The chart, which I would like to insert in the record at
this point, if I may, shows charitable organizations, their lobbying
activities, and their eligibility for deductible contributions.
[The chart follows:]
CHAR
lIABLE ORGANIZ
ATIONS, LOBBYING, AND DE
DUCTIBLE
Fraternal
Veterans
Large public charities, large
religious denominations
Small public charities, pub-
lic interest law firms
Social welfare
organizations
May lobby withde-
ductible'dona-
tions.
May lobby with
deductible
donations.
May carry on sizable lob-
hying programs with de-
ductible donations.
Eligible for deductible do-
nations, but forbidden
all but "insubstantial"
lobbying,
May lobby, but
not eligible for
deductible
donations.
All these charities are tax exempt. There are some charitable or-
ganizations eligible for deductible contributions which may lobby to
an unlimited extent. These include fraternal and ve:terans' organiza-
tions.
Some large public charities and large religious denominations may
carry on relatively sizable lobbying programs, including advertising
programs, if they so wish, with deductible donations.
Small public charities, including public interest law firms and in-
cluding by far most of the environmental groups are eligible for de-
ductible donations, but are forbidden all but insubstantial lobbying.
The effect of this restriction is greatly to impede, and almost prohibit,
any kind of legislative activities on the part; of the small public chari-
ties, environmental groups or public interest law firms.
Last, at the right side of the chart, is the category which the tax
code refers to as "social welfare organizations." These groups may
lobby, but they are not eligible for deductible donations.
I can give specific examples of how these various and capriciously
varying, restrictions work.
The veterans' groups, for example, can lobby against amnesty with
deductible money, but a small religious denomination such as, for ex-
ample, the Quakers, are not able to lobby for amnesty with tax-de-
ductible contributions. The Catholic Church can lobby against abortion
with deductible funds, but a woman's rights group would not be able
to lobby for abortion with deductible funds.
The Sierra Club is eligible to lobby, but isn't eligible to do so with
deductible donations. The principal Sierra organization is not eligible
at all for deductible donations, which, I think, was pointed out in the
last hearing.
I would argue then that within the class of charitable organizations,
the environmental groups and public interest law firms are severely
discriminated against vis-a-vis these other kinds of charitable
organizations.
Senator HART. This discrimination is the result of the Code itself?
Mr. BLACK. Yes, sir, it results entirely from the statutory frame-
work and not at all from interpretation. Of court, the Code provisions
embodied in regulations, but only flesh out the intent of the Congress.
PAGENO="0104"
138
These prohibitions, or their absence, are all contained in the revenue
code.
I think that this problem of discrimination among various kinds of
charities, and the other problem, the nondeductibility of business
grassroots advertising, is a situation with constitutional overtones. I
think that to penalize businesses' grassroots lobbying is an embodi-
ment in the tax code of an economic penalty based solely on kind of
speech or the forum which is being used for speech. I think that is
constitutionally quite questionable. With respect to the situation that
the public interest law firms, including the environmental law firms
and most environmental groups, the fact that they cannot lobby with
deductible funds, whereas other charitable groups can and do, is
another situation with constitutional overtones.
I think there is an equal protection problem here, in that otherwise
identical charitable organizations are discriminated against on the
basis, if you will, of their first amendment activities. And, of course,
not only is there a fifth amendment problem, but also a first amend-
ment problem, since after all, what we are talking about here is
speech.
I think also that this committee's hearings, especially the earlier
session, brought out another const.itutioiial problem which arises not
only in section 162(e). but also in the sections which regulate the
charities. The terms in the statute are very vague. I would argue,
Senator, that the. terms in sections of the code which regulate char-
ities, such as references to propaganda. references to influencing leg-
islation, and references to substantial or insubstantial quantities of
lobbying, are incapable of the kind of precise definition that the Su-
preme Court requires when statutes attempt to regulate speech.
In the area of speech, since first amendment rights are so important,
the Supreme Court has long held that statutes must be drawn with
crystal clarity, if you will, because it is crucially important that the
people who are going to exercise first amendment rights have clear
notice as to what they may or may not do. And vagueness in statutes
regulating first amendment activities serves to chill those activities.
I have iio way of knowing down at Tax Analysts what "substan-
tial" or "insubstantial" lobbying is. Years and years of court cases and
administrative interpretation have sTied no light on this term. In the
case of a group as small as we are, in order to stay on the safe side of
the Internal Revenue Service, we don't engage. in any kind of lobbying
activities except those expressly permitted by the revenue rulings,
such as my coming here today by invitation. This problem of insub-
stantial versus substantial just doesn't worry very large organizations
such as the Catholic church. The test doesn't apply at all to veterans
and fraternal organizations.
I think, to an admittedly lesser extent., that the phrase "legislative
matters and grassroots lobbying," et cetera, in the code and regula-
tions doesn't lend itself to any kind of clear definition which satisfies
the Supreme Court's tests. In the last hearing Mr. Fant suggested that
the term "legislative matters" should refer to any subject capable of
being studied by a legislature. Mr. Bickwit challenged him on that,
and said that that seemed too broad. Both these gentlemen are ex-
perienced attorneys. Mr. Bickwit has plenty of experience in the
Congress, and Mr. Fant is a tax attorney. It doesn't augur well for the
PAGENO="0105"
139
constitutionality of the statute that two such attorneys' interpreta-
tions could vary so much.
Any administrative prerogative can be taken back by the Congress
if that prerogative is granted by a statute. So under Mr. Fant's defini-
tion, it might be argued that companies couldn't deduct certain kind
of expenditures relative to lobbying in the administrative, process be-
cause at any point next year or the following year, the Congress might
decide that it delegated too much authority and was going to take it
back, and that therefore the "administrative" matter is really a leg-
islative matter.
I would have a terribly difficult time defining that term. And I
think that is the kind of vagueness problem that the statute embodies.
The impetus that gave rise to these hearings, apparently, was that
people among whom a principal concern was the protection of en-
vironmental quality observed that there were millions of dollars being
paid for advertisements that had to do with legislation, whether they
fell under the restriction or not. And it was very unclear as to
whether deductions were being taken or not taken for those advertise-
ments.
One of my purposes today is to show that within the class of char-
ities, we have a similar problem with respect to organizations, tax
benefits, tax deductions, eligibility for deductible donations, et cetera,
all crucially tied up in important first amendment activities, including
lobbying with respect to environmental legislation.
It seems to me that one option open to the Congress here, and I
think the better option in terms of constitutional policy is not to make
the nondeductions rules of section 16~ more strict, or expanding the
scope of activities which are nondeductible, but rather taking off these
two burdens: the lesse.r burden on business advertising, and the over-
whelming burden on legislative activities of charitable groups. The
direction the Congress should take, in my opinion, Senator, is to re-
move these restrictions or these excises, if you will, rather than in at-
tempting to regulate speech more severely or in expanding the scope
of the regulations or the statute.
This direction, of taking these references to first amendment activ-
ities out of the tax code and out of the hands of the Internal Revenue
Service, since the discrimination against charities is so much greater,
is the answer, Senator, to the problem you raised-which is a very
real problem-of how can the impoverished idea find a forum.
If this committee decides to try to act to solve these problems,
that the direction it should take is in changing the tax code to allow
charities to carry on reasonable amounts of legislative activities.
And that, of course, would include the environmental charities.
That concludes my remarks, Senator.
Senator HART. I like the way you have phrased your VI, VI point.
When one class constitutional rights are burdened relative to another
otherwise similar class, the solution lies in expanding the liberties of
the burdened class-not in murdening the favored class.
That is a musically written sentence.
Mr. BLACK. Well, thank you.
I do think, though, that that is the way to resolve this conflict that
you have articulated so well.
Senator HART. Yes.
PAGENO="0106"
140
Mr. BLACK. And that the relief should flow to precisely those en-
vironmental groups for which I know you have particular concern.
Mr. BICKwIT. Is it your view, that the IRS should adopt a proce-
dure whereby public interest groups could challenge IRS rulings
which they feel grant illegal tax concessions to the taxpayers?
Mr. BLACK. That is really not up to the IRS. It is up to the courts
because to allow that is to expand the rules of standing as enunciated
by the Supreme Court.
We believe strongly that when the Treasury or the IRS illegally
softens the tax treatment on a group of taxpayers, that the public is
injured; that there is no question revenues are not collected which
would otherwise be collected; that there is resulting economic damage
to the public at large and also to individual taxpayers; and that
members of the public injured in such a way should, of course, be
allowed to sue in order to bring these questions before a court.
If that doesn't happen, there is simply no way for the courts to
review this kind of illegal activity.
I would point out there are half a dozen recent decisions in the
Federal Court of Appeals for the D.C. Circuit which go to illegal
activity by the IRS or Treasury in failing to collect tax.
Mr. BICKWIT. How about at the administrative level? Do you
feel the IRS procedures are presently adequate to allow citizens groups
to express their views there?
Mr. BLACK. Referring specifically to the section 162(e) problem,
the citizens can challenge an ad, for example, by reporting it through
the informer channels. If they get a reward, they know that the corpo-
ration was trying to deduct something improperly, and they will know
that the Revenue Service disallowed the deduction.
There may be no other way of knowing how the Service is enforc-
ing the law against such business interests. At Tax Analysts, prior to
bringing most of our suits, we have filed a petition with the Commis-
sioner and explained the rationale for our position.
There have been several instances in which the Commissioner has
said this is something we consider has merit, and we will study it and
report the results to you.
However, I will point out that we haven~t gotten any results yet
from these petitions.
It may be that there is something more that needs to be available.
Mr. BICKWIT. As I understand your testimony, you are not op-
posed to using the tax code to foster certain policy objectives. Your
problem, rather, is that the existing taxes which in some way penalize
forms of speech are constitutionally questionable?
Mr. BLACK. Well, I agree much more with the latter half of your
question than the former.
Mr. BICKwIT. That is my question. Do you agree with the former?
Mr. BLACK. Yes.
Mr. BIOKWIT. I can't remember what the former was.
Do you think the tax code should be used for policy purposes?
Mr. BLACK. Yes, it is an instrument of Federal governmental policy
just as the budget is. You could point out specific tax subsidies, and
I might say this one, or that one, has been proven not to be cost effec-
tive. If a subsidy benefits a high income class much more than a lower
income class, then I would say that raises serious questions about the
particular subsidy, but not about the overall question.
PAGENO="0107"
141
Mr. BIcKwIT. Now, if you subsidize the speech of one person or one
party to a controversy, do you think you have got constitutional prob-
lems in that you haven't given the other side of the controversy similar
subsidization?
Mr. BLACK. Yes.
Not only do I think there are constitutional problems with that, but
I think that the present tax subsidies to fraternal and veterans' or-
ganizations and the large charities as opposed the lack of subsidies
to the smaller organizations, is unconstitutional and Tax Analysts has
filed a suit to test the constitutionality of just this problem.
And if the committee feels it appropriate, I can insert into the record
the complaint in that suit which I have here.
Senator HART. Yes, let it be printed.
Mr. BLACK. It articulates the first and fifth amendment problems as
we see them with the existing statutes as they apply to different kinds
of charities.
Mr. BICKwIT. But in your view, if you extend that kind of subsidy
to all public interest groups, then you don't have constitutional prob-
lems? And what does the industry say on the other side of the fence?
Mr. BLACK. Well, I don't think business has articulated a position
on the bills to allow charities to do a little more lobbying.
There are such bills, and there were extensive hearings held in Ways
and Means in 1972.
Mr. BIcKwIT. We would be interested if for the record you might
appraise industry's possible constitutional arguments with respect
to-
Mr. BLACK. With respect to section 162(e)?
Mr. BICKwIT. No, with respect to the proposal you have made to
give favorable treatment to all public interest organizations who
speak out on a given matter.
Mr. BLACK. I will be glad to do that.
Mr. BICKwIT. If you could, it would be helpful. Perhaps I am being
paranoid, but such arguments, I think, could be anticipated.
[The following information was subsequently received for the
record:]
TAX ANALYSTS & ADVOCATES,
Washington, D.C., August 27, 1~74.
Mr. LEONARD BIcKwIT,
senate Commerce subcommittee on the Bnvironrnent,
Dirksen senate Office Building, Washington, D.C.
DEAR Mn. BIcKwIT: During the hearings on the legislative propaganda activi-
ties of energy and utility companies, you asked me if there wass business opposi-
tion to recent proposals to liberalize the rules concerning the legislative
activities of charities.
A preliminary analysis of the 1972 Ways and Means hearings on such a
proposal, H.R. 13720, turns up no indication of business opposition.
The hearings contain several statements by representatives of charitable
organizations `to the effect that most charitable interests do not conflict with
business.
A statement, by one member of Congress who is generally regarded as con-
servative, argues that foundation managers are people who have been successful
in business; the spirit of this argument runs contrary to the thesis that charity
and business lobbying would conflict.
A statement by the American Society of Association Executives, indicates no
opposition to the bill, even though the organization's membership consists, in
part, of business organization executives. The membership of the organization,
however, also includes charitable association executives. The Society did suggest
that a liberalization of the charity lobbying rules should be accompanied by a
PAGENO="0108"
142
liberalization of the grassroots lobbying provisions of Sec. 162(e) of the Internal
Revenue Code.
Business interests would nevertheless have much at stake in a proposal to
expand the effectiveness of public-interest groups in the tax, broadcasting, envi-
ronment, safety, and consumer fields, to name only a few. You may find it useful,
therefore, before you publish your hearings, to invite several corporrations and
trade associations to take a position on the recent action by the Ways and
Means Committee, announced on August 1, 1974, in Release No. 20, to lobbying
by charities. Alternatively, you might invite these parties to comment on a pro-
posal to liberalize both the Sec. 501 (c) (3) (Internal Revenue Code) and the
Sec. 162 (e) rules simultaneously.
Very truly yours,
SAMUEL H. BLACK.
Mr. BLACK. There wasn't any significant business response to the
~\Tays and Means testimony invitatjons or to the hearings themselves,
as far as I know.
Interestingly, the Treasury Department at the time took what this
committee might see as an antibusiness position. They said they would
support all charities being able to lobby, but only where there was a
business interest already lobbying on the other side.
Then other public charities came forward and said-the example I
have in mind is a large mental health charity. They said there isn't
any business interest against mental health and yet we cannot lobby
either under present law or under this Treasury-this limited Treas-
ury approval of the concept that where there was lobbying on one side,
charities should be allowed to lobby on the other.
So they forcefully made the argument, or at least the argument was
forcefully made that charities should be allowed to lobby whether
there was a business interest opposing them or not, whether it had al-
ready been articulated or not. The specter of business opposition to
charities' lobbying is something I haven't yet seen.
Mr. BICKwIT. Well. if you conclude that under no circumstances
would it be raised rationally, that would also be helpful.
Mr. BLACK. I would also point out there are private hospitals
and hospitals run by fraternal orders or veterans' organizations, pri-
vate veterans' organizations. and the fraternal hospitals and veterans'
hospitals are allowed to lobby under present law. And I haven't seen
any private hospitals complaining of that.
Mr. BICKwIT. Thank you, Mr. Black.
Senator HART. Thank you very much.
Mr. BLACK. Thank you, Senator, very much.
[The material referred to follows:]
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
Civil Action No. 833-73
Tax Analysts and Advocates, 732 Seventeenth Street, NW., Washington, D.C.
20006
Taxation With Representation, 2369 North Taylor Street, Arlington, Va. 22207
V.
George P. Shultz, Secretary of the Treasury, 15th Street at Pennsylvania Ave.,
N.W., Washington, D.C. 20220
Johnnie M~ Walters, Commissioner of Internal Revenue, 1111 Constitution
Avenue, NW., Washington, D.C. 20224
PAGENO="0109"
143
AMENDED COMPLAINT FOR DECLARATORY AND INJuNCTIvE RELIEF; THREE-JUDGE
COURT REQUESTED
1. This is an action to:
a. Declare unconstitutional the restrictions on legislative activities contained
in Sections 170, 501(c) (3), 2055, 2106, and 2522 of the Internal Revenue Code
of 1954, as amended, "the Code", as violative of the First and Fifth Amend-
ments to the Constitution of the United States, and
b. Enjoin defendants from continued enforcement of those restrictions and
of all applicable regulations and rulings thereunder.
JURISDICTION
2. This Court has jurisdiction of this action under the following statutory
provisions:
a. 5 U.S.C. Sections 701-706, because this action seeks to hold unlawful agency
action found to be contrary to Constitutional right,
b. 28 U.S.C. Section 1331(a), because this action arises under the Constitu-
tion and laws of the United States and the matter in controversy exceeds the
sum of value of $10,000, exclusive of interest and costs;
c. 28 U.S.C. Section 1340, because this action arises under the acts of Con-
gress providing for internal revenue; and
d. 28 U.S.C. Section 1361, because this action is in the nature of mandamus
to compel an officer of an agency of the United States to perform a duty owed
to the plaintiffs.
PLAINTIFFS
3. Plaintiff Tax Analysts and Advocates (Tax A/A) is incorporated under
*the District of Columbia Non-profit Corporation Act. Tax A/A's organizational
purposes are (a) to improve public understanding of the federal tax system,
and (b) to improve the administration of the tax laws by conducting a public
interest tax law practice. (Affidavit attached)
4. Plaintiff Taxation with Representation (Tax/Rep) is incorporated under the
District of Columbia Non~profit Corporation Act. Tax/Rep's organizational pur-
pose is to educate Congress and the public regarding federal tax issues by
presenting the testimony of tax professionals at legislative and administrative
hearings on tax matters. Tax/Rep has approximately 850 members throughout
the United States. (Affidavit attached)
5. The Internal Revenue Service (IRS) has ruled that plaintiff Tax A/A is
eligible to receive contributions which are deductible to the donor under Section
170(c) (2) of the Code and that Tax A/A is exempt from federal income tax
under the provisions of Section 501(c) (3) of the Code. The IRS has ruled that
plaintiff Tax/Rep is not eligible to receive contributions which provide tax
deductions to the donor, but that it is exempt from federal income tax under
Section 501(e) (4) of the Code.
DEFENDANTS
6. Defendant George P. Shultz is Secretary of the Treasury of the United
States and is charged by law with the administration of the Code; he dis-
charges this responsibility both directly and by delegation to subordinates.
He is sued in both his official and his individual capacity.
7. Defendant Johnnie M. Walters was, at the time the original complaint
was filed, Commissioner of Internal Revenue, and, as the delegate of the Sec-
retary of the Treasury, had overall responsibility for administration of the
Code. He is sued in both his official and his individual capacity.
8. In administering the Code defendants have enforced the statutory pro-
visions that are at issue in this action, and the regulations and rulings which
interpret those statutory provisions. Those provisions are Constitutionally in-
valid, and defendants' application of those provisions to the detriment of the
plaintiffs violates the Constitutional rights of the plaintiffs.
THE STATUTORY FRAMEWORK
9. Sections 170 (c) (2), 2055, 2106, and 2522 of the Code (hereinafter "the
Code's charitable deduction provisions") provide for the eligibility of charitable
and educational organizations to receive charitable contributions which are
PAGENO="0110"
144
deductible for tax purposes by the payor or donor. Section 501(c) (3) of the
Code provides exemption from federal income tax for charitable and educa-
tional organizations. Each of these sections conditions its tax benefits on the
requirements that "no substantial part" of the activities of these organizations
consists of "carrying on propaganda, or otherwise attempting, to influence leg-
islation". This condition wifi hereinafter be referred to as "the Code's restric-
tions on legislative activities".
10. Section 501(c) (4) of the Code provides exemption from federal income
tax for organizations "operated exclusively for the promotion of the social
welfare" and does not restrict their legislative activities. Yet 501(c) (4) or-
ganizations of the type exemplified by Tax/Rep are not eligible to receive con-
tributions which provide tax deductions to the donor.
11. The Code grants -the benefits of tax exemption and eligibility to receive
contributions which provide tax deductions to the payors or donors, without
imposing restrictions on ieigslative activities, to the following organizations:
a. Veterans organizations, contributions to which are deductible for the donor
under conditions imposed by Sections 170, 2055, and 2522 of the Code, which
sections impose no limits on the use of these contributions for legislative
activities.
b. Fraternal beneficiary societies, contributions to which are deductible for
the donor under the conditions imposed by Sections 170 and 2522 of the Code,
which sections impose no limits on the use of these contributions for legisla-
tive activities.
c. Trade associations, chambers of commerce, and similar business associa-
tions, payments to which are deductible for the payor under the conditions im-
posed by Section 162 of the Code and which are free to carry on unlimited legis-
islative activities (other than grassroots appeals to the general public) when-
ever legislation has a direct relationship to the payor's business interests, and
d. Labor and agricultural organizations, dues contributions to which are
deductible for the payor under the conditions imposed by Section 162 of the
Code and which are free to carry on unlimited amounts of legislative activities
(other than grassroots appeals to the general public) whenever legislation has
a direct relationship to the payor's business interests.
INJURTES SUFFEBED BY THE PLAINTIFFS
12. Plaintiff Tax A/A desires to engage in substantial legislative activities
in support of its charitable and educational purposes. In many cases, such activ-
ities are the only available means for pursuing these purposes effectively. How-
ever, plaintiff Tax A/A cannot engage in substantial legislative activities with-
out jeopardizing its tax benefits under the Code's charitable deduction and
tax exemption provisions.
13. Because the Code's restrictions on legislative activity are inherently vague,
plaintiff Tax A/A is unable to establish precisely which, or to what extent,
activities are prohibited by those restrictions. As a consequence, plaintiff is
forced, in practice, to adopt a very broad reading of the restrictions on legisla-
tive activities and to eschew a variety of activities that may not, in fact, be
proscribed.
14. Plaintiff Tax A/A is severely injured by the Code's restrictions on legis-
lative activities in carrying out its charitable and educational purposes be-
cause many other organizations, such as those described in paragraph 11, suprc&,
which are in all pertinent respects similar to plaintiff, but which express view-
points opposed by plaintiff, are free to engage in legislative activities while
enjoying the benefits of tax exemption and eligibility to receive contributions
which provide tax deductions to the payors and/or donors. -
15. In order to raise funds to support its charitable and educational activities,
plaintiff Tax/Rep desires to enjoy the same tax benefits as are enjoyed by other
charitable and educational groups, including eligibility to receive contributions
which provide tax deductions to its donors. But, defendants have ruled that solely
because of the Code's restrictions on legislative activities, Tax/Rep is not eligible
to receive contributions which provide such tax deductions.
16. Plaintiffs do not have an adequate remedy at law. Each of them is irrepa-
rably injured by the Code's restrictions on legislative activities, which prevent
them from carrying out their charitable and educational purposes. Continued
enforcement of the challenged restrictions will result in further irreparable in-
jury to the plaintiffs.
PAGENO="0111"
145
GROUNDS FOR RELIEF
17. The Code's restrictions on legislative activities unconstitutionally abridge
the First Amendment freedoms of speech, association, and press, and the First
Amendment right of petition of plaintiff Tax A/A, by conditioning the benefits
of eligibility under the Code's charitable deduction provisions, and under the
tax exemption, upon surrender of such First Amendment freedoms and rights.
18. The Code's restrictions on legislative activities unconstitutionally deny the
equal protection of the laws and unconstitutionally abridge the First and Fifth
Amendment rights and freedoms of plaintiff Tax A/A in that:
a. The restrictions condition the enjoyment of tax benefits by plaintiff Tax A/A
on the surrender of First Amendment freedoms and rights, while other organiza-
tions similar in all pertinent respects to plaintiff may carry on substantial legis-
lative activities without restrictions and still enjoy the same tax benefits, and
b. The restrictions are based on impermissible distinctions of wealth and size
because they permit legislative activities which are not a "substantial" part of an
organization's total activities, and thus enable organizations subject to the re-
strictions but having larger budgets and membership than plaintiff, Tax A/A, to
engage in more legislative activity than plaintiff while still retaining their tax
benefits.
19. The Code's restrictions on legislative activities unconstitutionally abridge
the First Amendment rights and freedoms of plaintiff Tax A/A and its right to
due process of law as guaranteed by the Fifth Amendment, in that:
a. The restrictions-and specifically the words "substantial", "propaganda",
and "attempting, to influence legislation"-are so vague that plaintiff Tax A/A
cannot reasonably ascertain what activities are restricted, or the extent of the
restriction,
b. The restrictions confer unconstitutionally broad discretion on defendants.
Defendants' decision to grant, not to grant, or to revoke tax benefits are based on
administrative determinations as to the extent to which plaintiff Tax A/A will
engage in legislative activities. Because these determinations are based on uncon-
stitutionally vague criteria, plaintiff, who is subject to this enforcement proce-
dure, is denied due process of law,
c. The restrictions establish an unconstitutional prior restraint on activities
protected by the First Amendment. This restraint arises because defendants may
grant, fail to grant, or revoke substantial tax benefits based on defendants' deter-
mination as to the extent to which plaintiff Tax A/A has or will engage in legis-
lative activities, and
d. The restrictions establish an additional prior restraint on activities protected
by the First Amendment because the vagueness of the law forces plaintiff Tax
A/A to engage in constant self-censorship, so as to avoid any activity that might
cause the defendants to revoke plaintiff's tax benefits.
20. The Code's restrictions on legislative activities unconstitutionally deny the
equal protection of the laws and unconstitutionally abridge the First and Fifth
Amendment rights and freedoms of plaintiff Tax/Rep, in that:
a. The restrictions preclude plaintiff Tax/Rep from obtaining substantial tax
benefits solely because Tax/Rep has chosen to exercise its freedoms of speech,
association and press, and its right of petition, and
b. The restrictions deny eligibility to receive contributions which provide tax
deductions to donors to Tax/Rep, while other organizations, similar in all perti-
nent respects to plaintiff Tax/Rep, may carry on legislative activities without
restriction and nevertheless receive contributions which provide tax deductions
to the payors and/or donors.
21. For the foregoing reasons, the Code's restrictions on legislative activities
are unconstitutional, both on their face and as applied.
Wherefore, plaintiff pray:
That this Court convene a three judge court pursuant to 28 U.S.C. Section
2284 to hear the merits of this amended complaint;
That the three judge court declare the Code's restrictions on legislative
activities null and void as violative of the First and Fifth Amendments to the
United States Constitution;
That the three judge court permanently enjoin defendants from enforcing
the Code's restrictions on legislative activities;
That the three judge court enjoin defendants from applying the Code's restric-
tions on legislative activities when considering whether plaintiff Tax/Rep is
entitled to the tax benefits accorded to other charitable and educational groups;
PAGENO="0112"
146
That the plaintiffs be awarded their costs and disbursements, including rea-
sonable attorneys' fees; and
That the plaintiffs be granted such other relief as the Court deems to be just
and proper.
Respectfully submitted.
BERLIN, ROISMAN & KESSLER,
ANTHONY Z. ROISMAN,
CLIFTON E. CURTIS.
TAX ANALYSTS AND ADVOCATES,
SAMUEL H. BLACK,
THOMAS F. FIELD.
OUTLINE OF COMMENTS CONCERNING TAX TREATMENT OF BUSINESS EXPENSES
RELATING TO LEGISLATION
(By Samuel H. Black, Tax Analysts & Advocates)
SENATE SUBCOMMITTEE ON THE ENVIRONMENT, JULY 18, 1974
I. Does the tax system subsidize business lobbying?
A. The corporation income tax is a net, not a gross, income tax.
B. Deductibility of actual, directly-related `business expenses by business
is simply the proper method for computing taxable income-not a tax
subsidy.
C. If lobbying and advertising are directly related to the generation of
income, they should be deductible.
D. Since Internal Revenue Code Sec. 162(e) (2) (B) disallows deduction
for "grass roots" business lobbying, the Code penalizes rather than sub-
sidizes business lobbying. Advertising and lobbying are exercises of the
freedom of speech and the right to petition the Congress for a redress of
grievances.
II. Does the tax system penalize lobbying by public-interest groups?
A. The charitable deduction, and tax exemption for charities, are true
tax expenditures. These provisions have little to do with the computation of
net income.
B. Some charitable organizations are not only tax-exempt, are eligible
for deductible contributions, but also may lobby to an unlimited extent.
1. Fraternal charities.
2. Veterans' organizations.
C. Some charities are exempt and deductible and may carry one sizeable,
but not unlimited lobbying.
1. Large public charities.
D. Some charities are exempt and deductible but may carry on only minor
("insubstantial") lobbying. This category consists of small and medium-
sized public charities. As compared to categorieS 11(B) and 11(C), the
group of small public charities, including most environmental groups and all
public interest law firms, is discriminated against in the ability to lobby.
This discrimination is presently the subject of a lawsuit by Tax Analysts
and Advocates.
B. Some public-interest groups are tax exempt (but not eligible for de-
ductible contributions) and may lobby to an unlimited extent. This cate-
gory `consists of "Social welfare" groups, organized under `Sec. 501(c) (4)
of the Internal Revenue Code, including such organizations as the Sierra
Club, the ACLIJ, and the League of Women Voters. As compared to cate-
gories 11(B) and 11(C), social welfare organizations are also discriminated
against because of their legislative activities. (This issue is also raised in
the lawsuit mentioned above.)
F. Nevertheless, all these organizations may lobby at least to a small
extent, and often to an unlimited extent, with tax-subsidized dollars. By
contrast, as stated in I (D), above, business' legislative `activities are
penalized by the nondeductibility rule for grass roots lobbying.
III. Why single out business grass roots lobbying, which should be constitu-
tionally protected, for penalty treatment?
A. Populist view that corporations and big business are intrinsically evil.
evil.
B. Know-nothing view that lobbying is evil.
C. View that the public can be fooled by advertising.
PAGENO="0113"
147
D. In a dispute between different interests, one interest is often tempted
to censor the other.
IV. Vagueness in statutes can result in rights being placed in jeopardy; this
statute is so vague as to be constitutionally suspect.
A. The term "legislative matters" (Sec. 162(e) (2) (B)) is not self-defin-
ing, and the regulations under Sec. 162, Regs. 1.162-20(c) (4), do not define
this term. It is a fair assumption that there is no topic which is not (or could
not be) considered by some federal, state, or local legislature each year~
Does this mean that no advertisements are deductible at all?
B. This is a statute regulating speech. Is the statute specific enough to
define exactly what is permitted, so that citizens will have clear notice of
the law and of a "safe haven" of clearly permitted activity?
C. Would a small business think twice before running an ad relating to
a matter before a legislature? Doesn't this force taxpayers to censor them-
selves? Does the statute chill the exercise of the freedom of speech and the
right of petition?
D. Could the statute's lack of clarity lend itself to selective harassment
of political "enemies" since a business would not be able to cite any "safe-
haven" tests to prove to the government (and to reassure itself) that deduc-
tions were allowable?
\T. If the present law is not to be changed, it could be letter enforced.
A. The regulations should be lengthened and clarified, perhaps with ex-
amples in a continuum from clearly deductible advertisements to clearly
non-deductible advertisements.
B. Coupons in ads, to be sent to legislators, taking a business-advocated
position on a "legislative matter," could be prohibited.
C. The regulations could include the name of a specific office in Wash-
ington, to which citizen informants could mail "offending" advertisements
on legislative matters, to be routed through channels to the appropriate
enforcement office.
D. Public interest groups could help enforce the law by sending in offend-
ing ads to IRS and publicity demanding "informers' fees" if IRS enforcement
led to a higher tax assessment.
VI. When one class' constitutional rights are burdened relative to another
otherwise similar class, the solution lies in expanding the liberties of the bur-
dened class-not in burdening the favored class.
A. The Congress could end one discrimination against public interest groups
by repealing the lobbying and propaganda clauses in Sec. 501(c) (3) of the
Internal Revenue Code (and related sections).
B. This repeal would lessen the apparent disparity between business' and
public-interest organizations' ability to participate in the legislative process.
C. The constitutionally sound solution does not lie in the direction of cen-
soring business advertising, nor does it lie in making business' access to the
executive branch nondeductible.
Senator HART. Our concluding witness is senior vice president of
Georgia Power, Mr. Harold 0. McKenzie, Jr.
STATEMENT OP HAROLD C. McKENZIE, JR., SENIOR VICE PRESI-
DENT, GEORGIA POWER CO.; ACCOMPANIED BY FRANCES
PLEDGER, ADVERTISING MANAGER; AND N. UNDERWOOD, GEN-
ERAL COUNSEL
Mr. MCKENZIE. I have with me Mr. Underwood, who is a member
of the law firm who acts as our general counsel, and Mrs. Frances
Pledger, our advertising manager.
I have distributed to the subcommittee and staff the full text of my
stat'~ment. In the. interest of time I will briefly summarize my testi-
mony and then I will be happy to answer any questions.
Senator HART. Thank you, very much.
Let me order that it be printed in the record.
Mr. McKENzIE. The Media Access Project, in testimony before this
subcommittee on May 6, made a number of allegations against the
42-367-75-------S
PAGENO="0114"
148
electric utility industry and several individual companies including the
Georgia Power Co. The, crux of the allegations which have been di-
rected against my company is that our advertising program-Or at
least a portion of it-is "political propaganda" and therefore the costs
of this advertising should be nondeductible for tax purposes and
should constitute nonoperating expenses for ratemaking purposes.
Any legislation-or administrative regulations-which would re-
sult in the expenses of advertising of the type I will describe today
being classified as nondeductible-or as nonoperating expenses-would
seriously undermine the efforts of privately-owned utilities to cope
with out national energy requirements.
I have attached some exhibits to my prepared testimony which
will enable the subcommittee to see our total advertising program in
perspective. I have also set forth in the exhibits our company's media
costs as well as our total advertising expenses. In 1973 we spent less
than one-fifth of 1 percent of our total revenues for media and ap-
proximately one-third of 1 percent of total revenues to `carry out our
entire advertising and public information program.
For a company involved in an industry as complex as the electric
utility industry-to spend less than one-third of 1 percent of its
revenues in a good-faith effort to communicate with its customers-
investors-and the general public-simply can't be regarded' as ex-
cessive or unreasonable under any criteria.
The question is often asked: "Does an electric utility need to ad-
vertise?" As with most short and simple questions-it's necessary to
define the terms of the question before it has any real meaning.
Obviously, whether "advertising" is an appropriate expenditure
by a utility depends upon what is meant by the term. Perhaps a better
way to state the question would be to ask: "Is it necessary and appro-
priatè for an electric utility to communicate effectively with its cus-
tomers and the investing public?"
I submit to the subcommittee that if the investor-owned utility
industry is going to survive and to supply this Nation with electric
energy-it must continue to communicate with its customers and
with the investing public. And these communications must be mean-
ingful and go to the heart of problems which affect the industry
oday-and the costs of these communications must contmue to be
recognized as an essential operating expense.
I'm sure that every member of Congress recognizes that to be in-
volved in an industry involving energy in the 1970's is "a whole new
ball game." In the electric industry we had two decades of price
stability in the 1950's and 1960's when virtually every other industry
experienced a steady increase in prices.
But toward the end of the 1960's a number of forces interacted to
change drastically the patterns of cost and price stability which
utilities and their customers had enjoyed for 20 years.
The underlying cause of the crisis which faces the electric utility
industry today is growth. In the State of Georgia the consumption of
electricity doubles each 7 years. This means that we have to double
this size of our `plant each 7 years, as contraSted with an earlier figure
used today of 71/2 percent nationally. This .is a 10l/2-percent annual
growth of the combined rate.
A public utility has a lawful duty t serve the needs of its service
area. We don't have the option-during a .period of unusually high
PAGENO="0115"
149
interest rates-of deciding to forgo expansion or delay it. We have &
lawful responsibility to build generating facilities to serve the needs
of the State of Georgia.
In the next .3 years we must spend $11/2 billion for new construc-
tion. Nothing illustrates the magnitude of our problems more clearly
than the fact that yesterday our company was prepared to open bids
on a $130 million bond issue-and $60 million of preferred stock-and
for the first time in our history, there were no bids.
This means that we now have to look for other ways to obtain this
necessary long-term financing-and the cost of this capital is going
to be very expensive.
Who is affected by the cost of this capital? Not just the management
and stockholders of the Georgia Power Co., hut every consumer of
electricity in our service area.
The increasing cost of capital is an example of `an economic fact
of life which affects our customers in a very direct way, and we believe
they have a right to he informed about these facts.
We have used our advertising program to inform the public about
the economic and technical realities which are changing this industry
so dramatically-and we solicit the active cooperation of the public
in copying with these problems.
For example, we have devoted a significant portion of our advertis-
ing program to encouraging energy conservation. We have explained
billing options available to customers. We have explained our rate
schedules including the seasonal changes in our rate structure.
What we attempt to convey to the public is a sense of perspective
regarding electric service. We have not overstated any of the problems
confronting our company, nor have we consciously permitted our
cu~torners to remain unaware of the problems which have increased
our cost of operation and consequently our customers' rates for service.
We believe dissemination-through advertising-of factual infor-
mation indicating the nature and extent of future and present prob-
lems of a financial nature affecting the company and its customers is
good will or institutional advertising of the highest and most respon-
sible order.
Is this political propaganda?. Are we misleading the public in any
way? Certainly not. I sincerely believe that we would be guilty of
dangerously misleading the public if we remained silent during this
period and did not inform our customers of the true circumstances
of their supplier of electric energy.
If the premise is accepted that the public has a right to informa-
tion which affects them in a direct and meaningful way, the next
question is whether it is appropriate to disseminate this information
through the traditional advertising media?
We have found that the use of our institutional and good will ad-
vertising is by far the least expensive way for us to communicate.
If we sent one individual item of information to each of our custom-
ers. the postage cost alone would be more than $100,000.
The Media Access Project contends there is something sinister about
our advertising during a period in which we are involved before a
regulatory agency. Apparently this argument assumes that a regula~-
tor might be unfairly influenced by the advertising program. Every-
one familiar with regulation knows that a regulatory proceeding lasts
PAGENO="0116"
150
several months and involves thousands and thousands of pages of
testimony.
It is ludicrous to argue that a regulator who reads one of our
advertisements conveying factual information about an economic
issue would be unfairly influenced when he has been presented with
days of testimony and hundreds of pages of data on that issue in a
regulatory proceeding.
It is an exercise in fantasy to pretend that a utility could sustain a
meaningful communications program with the consuming and invest-
ing public if it suspended its advertising program during the pendency
of regulatory proceedings.
Likewise, it would be absurd to modify the advertising program to
omit references to the underlying circumstances facing the company
which coincidentally may also be factors in the company's regulatory
proceeding.
In summary, public utilities are now deeply immersed in the eco-
nomic and political crosscurrents of our society, in environmentalism,
consumerism, uncontrolled inflation, and the energy crisis.
I believe that the failure of a public utility to provide the public
with information needed to see utility service in a reasonable perspec-
tive would be a dereliction of our responsibility as a public utility.
There can be no serious doubt that to change the current accounting
treatment of advertising expenses of utilities would significantly re-
strict the flow of information from utilities to their customers. This
would be one more profoundly disturbing development in our industry
and I urge the subcommittee to reject any suggestion which would
tend to restrict rather than enlarge the public's right to know.
Senathr HART. Thank you, very much.
I won't give you a chance to respond to this because it would keep
us here until late afternoon. But an almost throwaway line that you
used, the experience on yesterday's market was it, or your efforts-
Mr. MCKENZIE. Yes, sir.
Senator HART. It is an item of enormous concern. And it should
be to this committee and every committee of Congress.
I know more than one utility in Michigan will have to scale down
substantially its projected program because of the difficulty of getting
additional-
Mr. MCKENZIE. This inevitably means that at some point in time
there well may not be enough capacity to meet the demand. Or more
expensive short-term solutions will have to be solved.
Mr. BICKWIT. I wonder if you, for the record, could give us an ex-
ample of the kind of ad which should be included in FPC 426.4 and
this treated as a below-the-line expense for ratemaking purposes.
Mr. MCKENZIE. I think rather clearly, yes-well, I will give you a
specific example.
Several years ago there was quite a legislative battle in Georgia to
enact what was known as the Territorial Service Act, which assigned
the responsibility to the Public Service Commission to divide territory
between municipal suppliers, cooperatives, and private utilities.
Had we run an acT advocating a position on that particular legisla-
tion, yes. that certainly would have been appropriate.
Mr. BIcKwrr. Your statement speaks of your company's respon-
sibility to keep its consumin~ and investing public informed as to the
problems faced by Georgia Power in providing service. What kind of
PAGENO="0117"
151
benefits do you see accruing to the company as a result of your ad-
vertising campaign?
Mr. MCKENZIE. Stated most briefly and most succinctly, our basic
survival. At the time we are being faced with growth and inflation-
producing compound problems for us, and I see no change on the hori-
zon right now on either one. The price of electricity is going up just
as dramatically there as it is anywhere else. And we have got to have
the public willing to continue to accept us as a supplier if we are going
to remain in business.
Mr. BICKWIT. This is a question I should have asked of the repre-
sentative from Shell, but couldn't find the ad at the time he was on
the stand.
We discussed the distinction between influence and educate. Senator
Hart pointed out that there may not be, from a pure literal interpreta-
tion, any distinction, in that education includes influence.
But the language in the Shell ad said, "We urge most strongly that
the type and form of the control be carefully considered to be sure that
it will have the correct impact. It should not be a hastily enacted attack
on the industry which would impose corporate excess profits taxes based
on some arbitrarily chosen historical performance.
Quite apart from whether this meets all the requirements for non-
deductibility or deductibility, do you regard the words, "We urge most
strongly" to be an attempt to influence as opposed to merely educate?
And I should say we will seek a response to that question from the
Shell witness as well.
Mr. McKENZIE. Well, I came prepared to discuss our advertising
and not Shell's. We have done no advertising falling in that category.
So, I am really not competent to express any position on that.
Mr. BICKWIT. That is fine.
Thank you, very much.
Senator HART. Does counsel want to take a shot at it?
Mr. UNDERWOOD. No, thank you, Senator.
Senator HART. Did either of you have anything you would like to
add?
Mr. UNDERWOOD. No, we ified a rather lengthy statement.
Senator HART. Thank you, very much.
[The statement follows:]
STATEMENT OF HAROLD C. MCKENZIE, JR., SENIOR VICE PRESIDENT
GEORGIA POWER COMPANY
My name is Harold C. McKenzie, Jr. and I am Senior Vice President of
Georgia Power Company. I appear today in response to a letter dated June 26,
1974, from the Chairman of this Subcommittee to the President of our Company
inviting our participation in today's hearing. Senator Hart's letter indicated
that the Committee is considering the "treatment of certain energy and environ-
mental advertising expenses for tax and FPC accounting purposes" and made
reference to testimony received on May 6, 1974, from attorneys representing
Media Access Project alleging that the cost of some of the advertising consid-
ered by the Subcommittee is not deductible under Section 162 of the Internal
Revenue Code and has not been properly categorized for FPC accounting
purposes.
I have obtained a copy of the testimony submitted to the Subcommittee on
May 6, 1974, by Harvey J. Shulman, Attorney with the Media Access Project,
Washington, D.C. I will respond to the allegations made by Mr. Shulman against
the Georgia Power Company, and while I do not purport to speak for the elec-
tric utility industry generally, I am aware of the fact that the circumstances af-
fecting our company today and the relationship between those circumstances and
PAGENO="0118"
152
our advertising program are certainly not unique in the industry. Since the
Chairman's letter did not invite comment relative to any specific legislative
proposal, I will not comment on any specific pending legislation. However, if the
Subcommittee's deliberations encompass consideration of specific legislation
including S-2532, which is a proposed Amendment to the Federal Power Act,
I would appreciate the opportunity to file a supplemental statement dealing
specifically with the proposed legislation. The crux of Mr. Shulman's testimony
is that certain firms in the energy-related industries are incurring expenses for
advertisements which are either non-deductible under the Internal Revenue
Code or should not be permitted as "operating expenses" for ratemaking purposes.
REGULATIONS INVOLVED
The Regulation which Mr. Shulman contends has been violated by certain en-
ergy related companies is Treasury Regulation 1.162-20, the applicable portion
of w-hich is set forth below:
"Institutional or `good will' advertising. Expenditures for institutional or
"good w-ill' advertising which keeps the taxpayer's name before the public
are generally deductlble as ordinary and necessary business expenses pro-
vided the expenditures are related to the patronage the taxpayer might
reasonably expect in the future. For example, a deduction will ordinarily
be allowed for the cost of advertising which keeps the taxpayer's name be-
fore the public in connection with encouraging contributions to such orga-
nizations as the Red Cross, the purchase of United States Savings Bonds, or
participation in similar causes. In like fashion, expenditures for advertising
which presents views on economic, financial, social or other subjects of a
general nature, but which does not involve any of the activities specified in
paragraph (b) or (c) of this section for which a deduction is not allowable
are deductible if they otherwise meet the requirements of the regulations
under Section 162." Reg. 1.162-20(a) (2).
[Ojertain types of expenses incurred with respect to legislative matters
are deductible under section 102 (a) if they otherwise meet the require-
ments of the regulations under section 162 . . . All other expenditures for
lobbying purposes, for the promotion or defeat of legislation . . . for political
campaign purposes (including the support of or oppsition to any candidate
for public office), or for carrying on propaganda (including advertising)
relating to any of the foregoing purposes are not deductible from gross in-
come for such taxable years." Reg. 1.162.20(c) (1).
It should be pointed out that on pages 10 and 11 of his testimony, Mr. Shul-
man has significantly misstated the applicable Treasury Regulation by setting
forth excerpts from Regulation 1.162-20(b), which applies only to taxable years
beginning before 1963. Regulation 1.162-20(c), set forth above, superseded the
sections of the Regulation which Mr. Shulman quoted pertaining to taxable years
beginning after 1962. For the sake of clarity, therefore, the record of these
proceedings should note that the portion of the Regulation quoted in Mr. Shul-
man's testimony on pages 10 and 11 is not applicable today.
With respect to the treatment of advertising expenses for ratemaking purposes,
Mr. Shulman contends that our Company has incurred expenses for advertising
which should be listed as non-operating expenses in Subaccount No. 426.4 of the
FPC Uniform System of Accounts, which Subaccount includes those expenses
incurred
for the purpose of influencing public opinion with respect to the
election or appointment of public officials, referenda, legislation or ordinances
(either with respect to the possible adoption of new referenda, legislation or
repeal or modification of existing referenda, legislation or ordinances) ; ap-
proval, modification or revocation of franchises; or for the purpose of in-
fluencing the decisions of public officials .
The advertisements of Georgia Power Company which the Media Access Proj-
ect characterized as "political propaganda" do not fall within the category of
"non-deductible" expenses for tax purposes or "non-operating" expenses of the
Federal Power Commission and are in no way violative of the Regulations cited
by the Media Access Project.
Moreover, the promulgation of Regulations or the enactment of legislation
which w-ould have the effect of classifying as non-deductible or as "non-operating
PAGENO="0119"
153
expenses" those costs associated with advertisements of the type I will describe
today would seriously undermine the efforts of privately owned public utilities
to cope with our national energy requirements.
GEORGIA POWER Co.'s ADvi~RTIsING PROGRAM
In order for the Subcommittee to see our advertising programs in some reason-
able perspective, I have attached some Exhibits which reflect our overall advertis-
ing program for 1973.
Exhibit A sets forth Georgia Power's total advertising outlays except for
certain appliance advertising by the Retail Appliance Division of the Company
which is not related to electric service. This Exhibit shows that the Company's
total media costs for 1973 represent less than one-fifth of one percent of total
revenues and that total advertising expenditures including salaries of all ad-
vertising and public information personnel were approximately one-third of one
percent of total revenues.
Exhibit B reflects the division of our advertising program among various
types of advertising messages dealing with energy conservation, environment,
customer billing, technological developments, utility economics and other sub-
jects. Of course, many of the advertising messages make reference to two or
more of these topics in the same advertisement.
Exhibit C 1 is a complete set of the Company's advertisements for 1973. I have
included a complete set of the advertisements to accurately reflect the purposes,
nature and tone of the advertising program when taken as a whole and I invite
the Subcommittee's attention to the overall program as well as to the specific
advertisements cited by the Media Access Project in its presentation of May
~, 1974.
OBJEcTIvEs OF GEORGIA POWER Co.'s ADVERTISING PROGRAM
In discussing the issue before the Subcommittee today, as it relates to Georgia
Power, I believe it would be helpful for me to state in general terms the cir-
cuinstances which underlie our Company's advertising program and to outline
briefly the objectives which we seek to accomplish through advertising.
The Georgia Power Company is a public utility corporation holding a franchise
to 1)rOvide electric service in substantially all of the State of Georgia. Our retail
rates and service are subject to the regulatory jurisdiction of the Georgia Public
Service Commission. The Company is subject to the Federal Power Act and to
the jurisdiction of the Federal Power Commission and numerous other regulatory
agencies ranging from the Securities and Exchange Commission to the Atomic
Energy Commission. I am sure that the members of the Subcommittee and Staff
are quite familiar with the Public Utility concept. This is the concept which holds
that regarding certain utility services, society is best served by private firms
dedicating their property to public service under conditions of a natural
monopoly in order for time public to obtain the benefit of high production levels
and high levels of efficiency. Governmental regulation is, of course, the sub-
stitute for direct market competition.
Since public utilities have long been held to be "affected with a public in-
terest," 2 such a company is accountable to the public to a much more mean-
ingful extent than non-regulated firms. It would be naive for the management
of our Company not to recognize that the public we serve constantly appraises
our performance much more closely than it appraises the performance of coin-
panies which provide a service in a directly competitive market.
Our Company, like many other electric utilities, experienced a long period
of retail price stability from approximately 1950 to 1970. In fact, we were able
to implement a number of retail rate reductions during this period. This was
due in part to the fact that generating plants grew in size and the accompany-
ing economies of scale and a number of dramatic technological advancement
made it possible for our Company to provide electric energy during these two
decades on a descending cost curve. However, as the decade of the 1900s came
to a close, a number of economic. technological and social forces interacted to
drastically change the patterns of cost and price stability to which electric util-
ities and their customers had become accustomed.
The underlying catalyst which has affected our Company so dramatically in
the 1970s has been the growth in demand for electric energy in our service area.
1 See p. 199.
2 Munn V. Illinois, 94 ITS. 113 (1877).
PAGENO="0120"
154
The demand for electric energy in Georgia now doubles each seven years which,
of course, means that the Company must double the size of its generation, trans-
mission, and distribution facilities to accommodate this growth in demand.
I would like to illustrate the kind of compounded economic realities which
confront our Company because of this growth in demand for electric service.
To install a coal-fired unit of generating capacity today costs more than one
and one-half times what it cost in the late lOGOs. The current unit cost of in-
stalling nuclear generating capacity is approximately three times the cost of
installing coal-fired generating capacity. But the effect upon our customers of
these increased costs is compounded by other economic circumstances of to-
day. The capital which must be attracted from investors to build such plant
is twice as expensive as was new capital ten years ago. For example, in January
of this year, our Company marketed a $150 Million bond issue at an interest rate
Of 85/s% whereas, in 1964 the interest rate on our bonds was 4~/8%. In addi-
tion to these obvious economic realities of the 1970s, the commitment to environ-
mental protection, a commitment which our Company shares, means that we are
required to invest millions of dollars for equipment used solely for environ-
mental protection.
LAWFUL DUTY To SERVE
One of the legal responsibilities which distinguishes a public utility from
other types of business is the "duty to serve." Under our franchise as a public
utility, our Company has a lawful obligation to take the steps necessary to
provide the electric power which is demanded by the public in our service area.
This distinction cannot be overemphasized in the context of the subject which
is under consideration by the Subcommittee, and I would like to illustrate the
practical application of this distinction by reference to a recent example in-
volving another industry with which I am sure the Subcommittee is familiar.
You will recall that in 1973, when most of the economy was subject to price
regulation, the Cost of Living Council prescribed retail prices for beef at a
level which many beef-distributing firms felt to be inadequate. A number of
these companies simply announced that they would close down their packing
facilities, which they did for a limited period of time. A public utility, regard-
less of its view of the regulatory polices to which it is subject, never has the
option of shutting down its operations nor the option of refusing to construct
additional plants having the capacity to meet projected energy demands of Its
service area. It is my strong conviction that this legal duty to serve carries with
it a duty to communicate effectively with the consuming public which we serve
as well as the investing public upon which we depend for capital to expand
facilities in furtherance of our lawful duty to serve our customers.
It is of crucial importance to the utility industry that the investing public,
including those who comprise and support investment institutions, have a basic
understanding of the principles of economics which are unique to this industry.
We should never lose sight of the fact that a utility has NOWHERE to turn
for capital for expansion except to the investing public, and if this source of
capital is lost through a lack of public understanding of the utility industry,
the only alternative is government financing and operation of facilities to pro-
vide utility service.
CONTENT OF GEORGIA POWER Co. ADVERTISING PROGRAM
In view of the fact that our Company and our customers experienced the long
period of price stability which I have described and have had this price stability
upset by the economic and technological realities to which I have alluded, we
have the responsibility to inform our customers of the implications of these
developments. Therefore, we have devoted a substantial portion of our advertising
program to encouraging energy conservation. We have used our advertising mes-
sages to explain seasonal changes in our rate schedules as well as billing options
available to customers. We have tried to give our customers an insight into the
nature of the electric utility industry including the basic nature of the economic
problems confronting it in the 1970s. Consistent with this approach of providing
meaningful information to our customers, in a limited number of advertising
messages we have indicated the nature and extent of economic problems that will
confront the State of Georgia if our Company is unable to attract the capital
necessary to carry out the minimum expansion program which will permit us
to supply Georgia with its electrical needs.
PAGENO="0121"
155
In short, what we attempt to convey to the public we serve is a sense of
perspective with respect to our Company. We have not over-stated any of the
problems confronting our Company and the electric utility industry; nor have
we consciously permitted our customers to remain unaware of the profound and
vexing problems which drastically have increased our cost of operation and,
consequently, our customers' rates for service. The dissemination, through
advertising, of factual information indicating the nature and extent of future
and present problems of a financial nature affecting the Company and its cus-
tomers is "good will" or "institutional" advertising of the highest and most
responsible order.
In the advertisements which the Media Access Project has labeled as "prop-
aganda" we convey the simple truth that the retail price for electric service in
our area will increase, and we indicate why. Is this political propaganda? Is it
political advertising, or an attempt to influence legislation? Certainly not. It is
an effort to convey the practical implication of facts known to the Company's
management which, in all probability, are not known to our customers. There are
multiple pragmatic reasons for this. For example, if a customer is contemplating
the construction of a new home to be furnished with all electric appliances,
we believe we have an obligatLon to inform him that any estimates he obtains
relating to operating costs for these appliances must be based upon the realiza-
tion that rates will increase Furthermore, basic notions of fairness strongly
suggest to us that the customer has the right to know that his electric bill is
about to increase. Advertising is by far the least expensive way for us to convey
this message. If we sent an individual item of information to each of our custom-
ers through the regular mail, the postage cost would be more than $100,000. The
total media expenditures during 1973 for the advertisements which Mr. Shulman
has questioned were approximately $39,000.
Mr. Shulman characterizes these particular advertisements as "political prop-
aganda" because, during certain periods of time in which these advertisements
were included in our advertising program, our Company was involved in rate
adjustment proceedings before a regulatory agency. Mr. ~hulman implies that
there is something sinister about communicating with our customers in the
manner of the specific advertisements which he cites and at a time in which a
legal proceeding involving a rate adjustment was in progress. I can think of
nothing more fundamental to the survival and well-being of the electric utility
industry than the free flow of information of the kind that I have described,
and efforts to communicate along these lines with the public would be totally
ineffective if they could be implemented only during periods of time in which a
company is not involved in legal proceedings concerning rate matters.
During a period of inflation when periodic rate adjustments are essential to
survival and in a period in which regulatory rate proceedings are highly complex
and require many months to conclude, it is an exercise in fantasy to pretend that
a utility could sustain a meaningful communications program with the consuming
and investing public if it suspended its advertising program during the pendency
of rate proceedings. Likewise, it would be absurd to modify the advertising pro-
gram during rate proceedings to omit references to the underlying circumstances
facing the Company which coincidentally are also factors in the Company's
request to the regulatory agency for authority to adjust rates.
The pricing interface between a utility and its customers is a tariff or rate
schedule wh~ch is filed with the appropriate regulatory agency. Such a rate
schedule is necessarily complex, and when there are seasonal or structural modi-
fications in our rate schedules, we have a definite obligation to inform the public
we serve in a direct and effective way of the substantive changes in these rate
schedules. Another example of the practical value of informational advertising
with respect to a regulatory proceeding is a billing practice which the Georgia
Public Service Commission has approved for our Company, known as "levelized
billing." Because of the widespread growth of air-conditioning in our service
area, a typical customer pays significantly more for electric service during the
summer months than he does for service during the winter. Recognizing that this
disparity of monthly electric charges creates a hardship on some family budgets,
we asked the Georgia Public Service Commission to authorize "levelized billing."
Under this procedure, an estimate of the customer's total annual bill is made
based upon his billing history; and the customer is permitted to make averaged
monthly payments based on annual use and their accounts are reconciled annually
as to overpayment or underpayment. We alerted our customers to the availability
of "levelized billing" and explained its operation through our advertising
program.
PAGENO="0122"
156
I cannot overemphasize my sincere belief that electric customers are entitled
to know when they will experience rate increases and what are the bases for rate
adjustments. For illustrative purposes, let us assume that an electric utility
has chosen to inform its customers of an impending energy shortage and the
need for reduction in the level of consumption of electricity by customers. Let
us assume further that, despite the customers' heed to the plea by the electric
utility to reduce consumption, their electric bills increase for the next several
months. Naturally, the customers would be highly confused by the fact that their
usage of electricity bad been reduced and still their electric bills continued to
increase.
What the utility customer in the above example would not fully understand,
however, was that the energy crisis was the catalyst that effected the changes in
the entire economic structure of our society. In other words, economic theory is
closely analogous to theories in other specialized fields-to-wit, any single action
which causes changes in a complex system will invariably affect the whole.3
Thus, in my example, the energy shortage caused the rising costs of all fuels.
This in turn necessitated what is known in the electric utility industry as the
"fuel adjustment clause." This is a device which, when approved by a regulatory
agency, permits the utility to pass on to the customer the increased cost of fuel
on a month-to-month basis without having multple full-blown rate increase pro-
ceedings. Without this explanation of the need to increase rates with a simulta-
neous need to reduce consumption of electricity, the customer's understanding of
the overall economic picture is reduced to an emotional response to his economic
plight.
Consequently, the consumer of electricity must understand the need for higher
rates or he will be unable to make a rational decision as to the efficacy of such an
increase. Should this misunderstanding lead to the utility's inability to obtain a
"fair return," then investors who put up some 80% of the capital each year to
expand systems such as ours will invest elsewhere. When capital flees, construc-
tion must slow drastically. Moreover, if the remaining construction cannot satisfy
demand, then many sacrifices must be made by the utility and by the public in
general.
Advertising is a utility's one consistent way to present facts to the public.
Interfering with an advertising program can hardly be done without sacrificing
a well-informed public for one which is ill-informed. In sum, I submit to you that,
as my aiove example illustrates, a public utility must inform its customers of all
relevant economic factors pertaining to the utility's present and future needs in
order to fulfill its obligations to those citizens whom it serves.
THE DANGERS OF CLAssIFYING ADVERTISEMENTS AS "POLITICAL" IN NATURE
The Media Access Project has utilized circular reasoning in characterizing
three of our advertisements as "political" and contending that expenses for these
advertisements should be classified as non-operating expenses. In his testimony
before this Subcommittee, Mr. Shulman frankly acknowledges that Georgia Power
Company's advertisements which refer to rate adjustments are not of such char-
acter as to render the monies expended therefor non-deductible for tax purposes.
On page 24 of his testimony, Mr. Shulman asserts that, ". . . if the rate increase
controversy seems far removed from a legislative forum and is confined to state
utility commissioners or courts, a strict reading of the current IRS regulations
would seem to permit deductibility." However, Mr. Shulman contends that such
ads represent non-operating expenses, and he cites as support for this thesis the
fact that the Federal Communications Commission in 1973 directed two Georgia
television stations to "afford opportunity for the presentation of contrasting views
on the rate increase issue." I would like to illustrate the circular reasoning which
Mr. Shulman has employed to arrive at his conclusion.
In the FCC proceeding referred to, the Media Access Project was representing
a group known as the Georgia Power Project. The Georgia Power Project is a
Note the biological theory known as "Harding's Law." which holds that "You cannot
do only one thing"-that Is, any one bIological change In a biological system will affect the
enthe system.
PAGENO="0123"
157
small group of individuals whose spokesmen publicly acknowledge that the
Project's primary goals are the political objectives of the ultimate replacement
of capitalism with socialism and that the group believes that the first step in this
process is to undermine confidence in public utilities and to achieve total public
ownership of utilities.4 While publicly acknowledging these ultimate goals, the
Georgia Power Project has sought to politicize virtually every public statement
and position which our Company has taken in recent months. For example, in
its advertising program the Company has made the simple factual observation
that it must expand its physical plant because the demand for electric energy
will continue to increase. The Georgia Power Project has sought to politicize such
statements by simply proclaiming that they constitute propaganda intended to
increase sales and profits. The Federal Communications Commission, without
purporting to pass upon the correctness or incorrectness of our Company's ad-
vertising program, directed two Georgia television stations to do more than they
previously had done in providing opportunity for contrasting views concerning
~ur rate proceedings.
Ironically, the Media Access Project now points to the FCC case as evidence
that the subject advertisements are politicaL In reality, any political connotation
which the advertisements may have acquired has been the result of public
statements of a political nature by Media Access Project's client in the FCC
proceeding, Georgia Power Project. It is patently obvious that in the case of
a group with political goals as broad as those of the Georgia Power Project
(such goals being to replace capitalism with socialism), virtually any informa-
tional message of substance could be politicized by publicly proclaiming that it
is inconsistent with the political goals espoused by such group.
In illustrating the circular reasoning of the Media Access Project I want to
make it clear to the Subcommittee that I am in no way quarreling with the full
rights of the members of the Georgia Power Project to criticize capitalism, the
private ownership of utilities, or the Georgia Power Company in particular. In
fact, I have participated in many television and radio discussion programs in
Georgia with members of the Georgia Power Project and I fully respect their
rights *to articulate their political and economic philosophy. But the point I
want to emphasize is that merely because a group such as the Georgia Power
Project takes issue with information conveyed in our advertising program, that
does not change the essential character of our advertising program from being
~ne of an informational character to one that is political in nature. In a real
sense, the acknowledged public efforts of a group of individuals bent upon
radical economic change and to undermine public confidence in a particular in-
dustry or company makes it all the more crucial to the continued well-being
of the Company that it have useful and effective channels of communication
with the public it is franchised and obligated to serve.
In summary, public utilities are now deeply immersed in the economic and
political cross currents of our society, in environmentalism, consumerism, un-
controlled inflation, and the energy crisis. I believe that the failure of a public
utility to provide the public with information needed to see utility service in a
reasonable perspective would be a dereliction of our responsibility as a public
utility. It is axiomatic that these complex realities do not have a discrete ex-
istence apart from the factors weighed by a regulatory agency in a proceed-
ing for a rate adjustment. To seize on this fundamental truth as a basis for
characterizing substantive utility advertising as "political propaganda" is to
play a dangerous semantical game. It is obvious to me that if the electric utility
industry is going to serve the public interest, it must make use of more rather
than less sophisticated communications with its customers and with the public
in general. I respectfully ask that this Subcommittee not entertain the type of
impractical and punitive recommendations presented by the Media Access Proj-~
ect. I strongly urge that this Subcommittee recognize the right and the obliga-
tion of a business to inform its customers, as well as the right of the customers
to be so informed.
See Transcript of Georgia Public Service Commission Docket No. 2465U and materials
discussed therein.
PAGENO="0124"
158
EXHIBIT A
Total
Year
Gross revenue
sales of
electricity
Institutional
advertising
media costs
Institutional
media costs
cents per
gross revenue
dollar
advertising
expenditures
including all
salaries,
expenses and
marketing
advertising
Total
advertising
cents per
gross revenue
dollar
1971
1972
1973
1974'
1974s(January-May)
$417,696,151
$506,058,516
596,777,465
752,776,660
282,086,034
$1,034,772
947,993
1,057,267
1,600,214
391,936
.24773
.18733
.17716
.21257
.13894
$2,154,757
1,876,794
2,013,623
2,968,220
784,426
.51587
.37086
.33742
.39430
.27808
11974 budget.
2 January-May actual.
EXHIBIT B
1973 advertising media expenditures by subject matter: Amount
Conservation of energy `$215,218
Utility economics 2 324, 211
Environmental information 398,270
Security lighting 4 14,666
Other customer information a 162, 147
Total 814,512
1 Ads giving factual tips for residential customers on how to conserve electric energy. Examples: "How does 73 differ
from 78?" and "Please. Turn it down when you're leaving."
2 Ads giving basic economic facts about utility operation. For the 3 advertisements-i radio, 1 television, i newspaper-
attached to Senator Hart's letter, referred to in Mr. Shulman's testimony before the subcommittee, media costs were
$39,536.
3 Ads explaining company programs for environmental protection and conservation of natural resources. Examples:
"The Chattahoochee River is cleaner this year" and "The Etowah" television spot.
4 1 television commercial on night street lighting.
5 All ads are informational in nature, but this category includes those which give information not specifically related to
preceding categories. Examples: "Plan. The plant." and "High temperatures may cause a spurt in your electric bill."
Senator HART. This concludes the testimony scheduled on the subject
matter. I never was a tax man. I have inhaled enough of this testi-
mony, though, to have the feeling that there are differences in degree
at least, in the several ads that have been presented, and the earlier
testimony, whether any of them are of such character as should be
treated under the Code as not deductible, I don't know. I am sure
many people have strong opinions. But I think the responsibility of
that is simply to refer to the Bureau the record, and indicate to them
that. we will expect them to make the judgment which they are qualified
to make and which I am not, and as to the treatment that should be
accorded each of the several ads.
Mr. Bickwit reminds me that there was some question with respect
to the treatment above and below the line on accounting under the
Federal Power Commission Act regulations, and I am even less in-
formed in that area.
All I can do is send the transcript to them to make that judgment.
Thank you very much. I am sorry we have held the witnesses for
so long.
[Whereupon, at 1 :27 p.m., the hearing was adjourned.]
PAGENO="0125"
ADDITIONAL ARTICLES, LETTERS, AND STATEMENTS
MOBIL OIL CORPORATION,
New York, N.Y., February 22, 1074.
Hon. PHILIP A. HART,
Chairman, Subcommittee on Environment, Senate Commerce Committee, U.S.
Senate, Washington, D.C.
DEAR SENATOR HART: This is in response to your letter of January 28, 1974
to Mr. William P. Tavoulareas, requesting information with respect to Mobil's
aidvertising. Samples of some advertisements characterized as "public service"
advertising are enclosed with your letter. You also state you would be happy to
receive copies of any of our other advertisements which we feel are particularly
informative. In addition, you request the following specific information about
Mobil's advertising efforts.
I. INFORMATION REQUIRED UNDER PARAGRAPH (~)
Under paragraph (a) of your letter you request the following:
"How much money did your company spend on all advertising in 1973?
"(1) Please break this down into product/service, goodwill (i.e., institu-
tional), political (i.e., non-deductible as a business expense under IRS
Regulation 1.162-20(c) (4)) advertising.
"(2) Please break this down for each medium (i.e., television, radio,
newspapers, magazines, pamphlets and brochures, other) ."
1. Total advertising e~vpenditure in 1.973
Mobil spent $16.2 million on all advertising in 1973. This does not include
amounts spent by affiliates of Mobile for advertising outside the United States.
2. Breakdown
A breakdown of Mobil's advertising expenditures is shown on Attachment A.
ATTACHMENT A, MOBIL OIL CORP.-1973 ADVERTISING EXPENSE (U.S.)
[In thousands of
dollarsj
Tele-
vision Radio
News-
papers
Pam-
phlets
and
brochures
Maga-
zines
and
trade
publica-
tions
Other
Tota
Product/service:
NAD 3, 007 659
Chemical 1,232 117
Total 4, 239 776
Goodwill: Corporate 5,232
Nondeductible: Corporate 208
Total 9,471 984
309
17
573
1, 598
1,160
276
99
6,422
2,625
326
799
411
573
36
41
2, 758
215
169
375
9, 047
6,282
829
1,536
650
3,142
375
16,158
II. INFORMATION REQUESTED UNDER PARAGRAPH (b)
Under paragraph (b) of your letter you request the following:
"What does the company consider to be public service advertising?
"(1) Is such advertising limited to goodwill (i.e., institutional) advertis-
ing, thus excluding product/service and political advertising?
(159)
42-367 0 - 75 - 9
PAGENO="0126"
160
"(2) How does the company consider each of the advertisements attached to
this letter-as product/service, goodwill (i.e. institutional) or political (i.e.
non-deductible) advertising?"
1. "Public $ervice" Advertising
The concept of public service advertising is contained in a longstanding
Treasury regulation now appearing as Reg. ~ 1.162-20(a) (2). Under such regu-
lation, "expenditures for institutional or `goodwill' advertising" are generally
deductible. The regulation provides more specifically that "a deduction will
ordinarily be allowed for the cost of advertising which keeps the taxpayer's
name before the public in connection with encouraging contributions to such
organizations as the Red Cross, the purchase of United States Savings Bonds,
or participation in similar causes. In like fashion, expenditures for advertising
which presents views on economic, financial, social or other subjects of a general
nature" are deductible provided they do not include expenditures for labbying
purposes, for the promotion or defeat of legislation, for political campaign
purposes or for carrying on propaganda (including advertising) relating to any
of the foregoing purposes.
It might be useful at this juncture to illustrate samples of advertisements
that Mobil has been advised constitute institutional or goodwill advertising, as
well as non-deductible advertising which might be considered to border on a
potential purpose for the promotion or defeat of legislation. In assisting Mobil
accurately to characterize its advertising for purposes of preparing its tax re-
turns, Mobil has instituted a program under which all of its advertising is sub-
mitted to outside counsel uiTder instructions to adopt the most conservative,
stringent test against Mobil in determining deductibility under the statute, regu-
lations and case law on this subject.
For your convenience, there is enclosed a complete set of 1973 newspaper and
periodic public service advertisements divided into four groups, the first three
of which we believe and are advised constitute institutional or goodwill advertis-
ing. Group IV contains advertising which we believe to be in the public interest
but which contain sufficient legislative potential to be regarded by ourselves and
outside counsel as possibly falling in the non-deductible category, and are there-
fore treated as nondeductible for tax purposes.
Group I consists of ten advertisements of the "Red Cross" variety. Four ("Nine
o'clock Scholar", "Oedipus Wrecks", "Great Plans . . ." and "Masterpiece Theatre
Invites") relate to the Masterpiece Theatre Mobil-sponsored program on pub-
licly-supported Channel 13 in the New York viewing area. The remainder in this
group relate to the New York Public Library, the New York City Parks Admin-
istration (Concert, Opera and Theatre program), the Mobil Harlem National
Professional Summer Basketball Championship, American Museum of Natural
History's West Side Day, British Theatre Season in Brooklyn and a Christmas
note to the Skylab astronauts.
Group II consists of 12 advertisements, ten of w-hich deal with ways of con-
serving gas while driving; one deals with driving safely; two relate to con-
servation of fuel in the home and one deals w-ith lighting in general.
Group III covers a broad socioeconomic field comprising some 15 advertise-
ments, some dealing with technology in general, an architect exhibit, Middle East
peace, New York drug law, conservation efforts, monopoly and capitalism.
Group IV, the non-deductible category, covers a variety of subjects including
a number of advertisements grouped under the general category of "the $66 bil-
lion mistake" relating in part to regulatory policies on antipollution control, and
general information on the energy shortage. There are some 23 advertisements or
brochures in this group. While none of these, in the opinion of counsel, is clearly
PAGENO="0127"
161
non-deductible, no absolute assurance can be given by counsel that a deduction
would be upheld and therefore, as noted above, this group of advertisements is
treated by the Company as non-deductible.
2. Specific request under 11(b) (1)-Is such advertising limited to goodwill (i.e.,
institutional) advertising, thus eo~clucling product/service and political ad-
vertising?
The answer to this question is largely illustrated by a Mobil news release
published as an advertisement in The New York Times on July 29, 1973 (en-
closed as Attachment B). In such release, Mobil announced that it was discon-
tinuing its gasoline advertising and would redirect its efforts! towards broad
public service and public information programs. Mobil also published an adver-
tisement in The New York Times on July 12, 1973 (Attachment C) listing the
headlines from illustrative advertisements. Thus, Mobil has shifted away from
product/service advertising to advertising which contributes to public awareness
or understanding of a variety of socioeconomic topics, some of which may border
on the "political" as noted in Group IV above. Mobil views all of the advertise-
ments submitted herewith as public service advertising, although expenditures
for the Group IV advertisements are not deducted.
3. Specific request under II (b) (2)-Treatment of advertisements attached to
letter of January 28, 1974
All of the advertisements, except one, attached to your letter of January 28,
1974 are regarded by Mobil as in the Group IV non-deductible category. Many
of them were 1973 advertisements that are shown in Group IV described above.
Some of the 1972 advertisements were not repeated in 1973. One advertisement in
particular, namely, "An Open Letter on the Gasoline Shortage to: [named
senators and representatives]" was the first advertisement submitted to outside
counsel who confirmed Mobil's own views that such advertisement, however in-
formational, touches closely on legislative subjects and should therefore be
treated as non-deductible. The one exception to the non-deductible category in
the enclosures to your letter is the advertisement entitled "The Lady Was Listen-
jag" which, on advice of counsel, is considered as deductible institutional
advertising.
If you have further questions or requests for information that may be of
assistance to the work of your Subcommittee, we would be pleased to respond
and cooperate to the best of our ability.
Sincerely yours,
HERMAN J. SCHMIDT.
Enclosures.
ATTACHMENT "B"
MOBIL OIL CORPORATION,
New York, N.Y., June 21, 1973.
Mobil Oil Corporation today announced it is discontinuing its gasoline adver-
tising, including its "Mr. Dirt" television and radio commercials.
The company said it would redirect its efforts toward broad public-service and
public-information programs covering the conservation of gasoline and specific
suggestions on more efficient use of available energy.
"The American public must develop a new national ethic with respect to the
use of energy," Mobil Chairman Raw-leigh Warner, Jr. said. "We as a nation
must adopt long-term approaches to conserve energy, because the energy shortage
will be with us for some time."
IThis ad appeared in the New York Times on June 28, 1973]
PAGENO="0128"
162
ATTACHMENT "C"
Ou~ Is PRECIOUS. LET'S NOT WASTE IT.
March, 1972
THE GAP.
May, 1972
EVEN IF YOU HAVE MONEY To BURN, You SHOULD SAVE ENERGY.
June, 1972
THE UNNATURAL GAS SHORTAGE.
September, 1972
ENERGY POLICY Is PRIORITY POLICY.
November, 1972
ENERGY Is INDUSTRIAL PLASMA.
December, 1972
Is ANYBODY LISTENING?
January, 1973
So MUCH TO Do, So LITTLE TIME.
March, 1973
YOU'VE HEARD GASOLINE Is SHORT. HERE ARE 8 WAYS To GET ALONG.
April, 1973
LET THERE BE JUST ENOUGH LIGHT.
May, 1973
BECAUSE THAT'S WHERE THE OIL IS.
June, 1973
These headlines are from some of the ads on energy problems we've published
in the past year-and-a half. So when people ask us why energy shortages have
takea us by surprise, we tell them we're not at all surprised. Just sorry.
For reprints of any or all of these messages, write Room 646, 150 East 42nd
Street, New York 10017.
PAGENO="0129"
163
N~r~ o'c~©th ~c~©~©r
Sunday evening at nine, a Victorian classic becomes thoroughly engaging
television when the Masterpiece Theatre dramatization of Tom Brown's School
Days begins on PBS. Channel 13 in New York.
The story, as you probably know, deals with a young boy's adventures during
his first years at Rugby in the 1820s. Atop hat and frock coat are the classroom
costume, but don't let that fool you. The curriculum is plenty tough, and so is
the ragging by upper-formers.
Tom takes a lot from that bully Flashman. He's a plucky tyke, though. He per-
severes. And, needless to say, he winds up the better man for it.
Tom Brown's School Days is fine entertainment, produced with the regard for
quality that continues to set these Masterpiece Theatre productions apart from
so much other television.
We share that regard. We've been getting high marks for quality these past
106 years ourselves.
See truth and bravery triumph. See Tom Brown win out. Be in your seat, and
quiet, when the bell rings on Sunday at nine.
GROUP I
© Mobil Oil Corporation
PAGENO="0130"
164
01973 Mobil Oil Co~po~otoo
Maggie Verver is so devoted to her
widowed father that even after her mar-
riage, and motherhood, the two con-
tinue to see each other almost as much
as ever.
That is how master novelist Henry
James heads Maggie's marriage for
the rocks in The Golden Bowl.
Before long, Maggie's marriage
seems wrecked. Her best chum, Char-
lotte, is in love with Maggie's husband.
Charlotte also happens to have wed
Maggie's father. Life is a tangle.
Masterpiece Theatre sorts it all out
in six episodes beginning Sunday at
9P.M. on PBS. That's Channel 13 in the
New York area.
Pull up a couch and tune in. You'll
enjoy some of the finest television any-
where, adapted from one of the most
penetrating psychological novels of
any period.
O~d~pus Wrecks
This ad appeared in the New York Times on March 22, 1973.
PAGENO="0131"
165
Th~r~a cr~ ~
~s soon cs h~s d~cd~
Who realty knows you're you? That's the tife-and-death question in The Man Who
Was Hunting Himself, a Masterpiece Theatre mystery that starts Sunday evening at
nine on PBS-TV.
This is a puzzler for the thinking mystery fiend. it's a drama of impersonation, espio
nage, murder. It's satin today's Europe. It could be straight out of today's headlines.
Join hostAlistair Cooke Sunday at nine for Part I of a first-rate thriller Like the Peter
Wimsey whimseys, which wilt return in December, this three-episode chiller is made
possible by a grant from
M©bH
1910 MobiiO,! Cp~~'atk~~
PAGENO="0132"
166
~w1
~ Y©U ~©
s~? o~ii ~ ~ o~
your ~ thdr~
A Masterpiece Theatre mystery is literate mystery
A whodidit.
And no less suspenseful for that.
You'll see, when the Masterpiece Theatre Mystery
Season opens Sunday, October 7, at 9:00 P.M. on PBS-TV
That's Channel 13 in the New York viewing area.
Be in your chair, ready to watch supersleuth Lord
Peter Wimsey's well-bred way with murder in Dorothy
Sayers' Clouds of Witness.
This is the third Masterpiece Theatre season made
possible by a grant from Mobil.
The quality hasn't changed.
Only the plots have changed, to mystify the innocent.
PAGENO="0133"
167
~©r~7pg© OT~Ir~J
~ ~ ©~
~ ~
Monday through Friday, next week, the New York Public
Library's Donnell Library Center at 20 West 53rd Street will turn
its large and comfortable auditorium into a theatre so you can
enjoy some of the finest art films you're likely to see anywhere.
The films will be screened at 4:00 P.M. and 6:00 P.M. on
Monday, Tuesday, and Thursday. On Wednesday at four, there
will be a special program for children. The six o'clock film that
day is a special for adults-a gorgeous look in color at Java's
Borobodur temple.
We don't have room here to give you the week's schedule.
Bütwe can tell you it includes films on Gauguin, Edward Munch,
Jackson Pollock, Eskimo art, and a lot more.
Best thing to do is stop in at the Don nell between now and
Monday for the complete program. It's all free to the public. Of
course, it costs the Don nell money, and we were happy to help
with some of what was needed.
Go to a movie at the library for a nice way to end the day.
This ad appeared in the New York Times on June 7, 1973.
PAGENO="0134"
168
C1973 M~b4IOi~Copô~ation
J~JT~jy y~~j ~ ~
LI \taV ~)~`J Ii ~
~ ~ ~hc~i~
You can't get tickets to some of New York's very best shows
because they're free.
In city parks you can see opera, watch a frisbee fly-in, enjoy
poetry readings, attend dance festivals, listen to concerts by the
Philharmonic, see a Metropolitan Opera performance, watch
Shakespeare.
All free.
The New York City Parks Administration wants to remind
you that this great entertainment and a lot more is available.
And that you find out when and where by calling (212) 472-1003
any day of the week from 10 in the morning until eight in the
evening. Parks people at that number will cheerfully tell you
about all the superb attractions you can't get tickets for.
We happen to know about one of the nicest. A visit to
Summergarden, at the Museum of Modern Art, is a tranquil way
to spend a weekend evening. (A grant from Mobil Foundation
makes Summergarden possible.)
* There's plenty more all over the city, though. Call 472-1003
to find out about it.
That's the ticket.
This ad appeared in the New York Times on July 5, 1973.
PAGENO="0135"
169
This ad appeared in the New York Times on August 23, 1973.
Tiny Archibald. Julius Erving. Dean Meminger. Artis Gilmore. Bob Love. The na-
tion's greatest pro basketball stars playing for a great reason: to support sports
and education programs for youngsters in New York and other cities.
Mobil underwrites the costs of the three-day tournament that pits pros against
neighborhood hotshots. We also provide a $2,500 scholarship, and a trophy for the
victors.
The tournament begins Friday, August 24th, at Mahoney Gymnasium, City Col-
lege of New York, 138th Street and Convent Avenue.
Proceeds from ticket sales go to the youth programs.
Get your tickets today at any Ticketron' outlet or at any of these locations: 1-lar-
em Professionals, Inc., 2123 Seventh Avenue; Appletown Sporting Goods, 2489
Seventh Avenue; and Small's Paradise, 2294 Seventh Avenue. Or you can pick up
tickets right at Mahoney Gymnasium.
PAGENO="0136"
170
~ I~
~j~;~j ~ EL~©Jy
This Saturday the American Museum of Natural History will
hold its fourth annual West Side Day.
Last year, 34,000 friends of the museum from all over the
city dropped by. Some activities they enjoyed included making
Masai jewelry and sculpting dinosaurs out of clay. This year, 100
community groups will set up exhibits and information desks
throughout the museum.
West Side Day gives the city a befter understanding of what
a wonderful resource the museum is. The museum's knowledge
of the community grows, too.
We've been friendly with the museum since the early 1940's
when Mobil became involved with its Department of Inverte-
brate Paleontology. The collection of micro-fossils there is in-
valuable to anyone concerned with oil and gas; and the
Micropaleontology Press, which Mobil helps finance, provides
information on micro-fossils to universities and business scien-
tists throughout the world. That's our business interest.
But we like West Side Day because it's a great way to spend
a September Saturday.
We hope New York families agree. And we hope other cor-
porations will consider how they might help support the
American Museum of Natural History
Whether you want to reach the museum for fun or with funds,
it's at 79th Street and Central Park West.
Seeyou Saturday.
This ad appeared in the New York Times on September 27, 1973.
PAGENO="0137"
171
© 1973 Mob~I O~t Corporator,
~
Think of it: A British Theatre Season in Brooklyn.
The Royal Shakespeare Company. The Actors
Company. The Young Vic. Three of the worlds truly
great troupes.
In repertory, in Flatbush.
This spectacular season opens at the Brooklyn
Academy of Music on January 9, with the Royal
Shakespeare Company doing Richard II. It continues
to late April; and, aside from the bard, offers work by
Chekov, Piath, Congreve.
Brooklyn's British Theatre Season has to be one of
the most extraordinary theatre events anywhere. We
congratulate the Academy of Music for puthng it
all together.
Tickets are reasonable (they start at $3.50), and
available at the Academy's Box Office at 30 Lafayette
Avenue as well as at A & 5, Bloomingdale~, and
Ticketron outlets.
If you enjoy the King's English, you'll love Brooklyn's
British Theatre Season. And you'll thank Brooklyn for
giving you the bard.
PAGENO="0138"
172
~~my CC~1~m©~
Jc~Ty9 ~ ~UD
© 1973 Mobjl 01 Corpor~on
Sorry the three of you can't be home for
the holidays. Not that you are the first, of course.
It's been that way down through the ages. Most
of us sit home by the fire, while a few are off on
far voyages of discovery
Jason and his Argonauts, seeking the
Golden Fleece. Magellan pressing across the
vast Pacific. Or Darwin, cataloging a newfound
insect on some bleak Galapagos island. Skylab
is all of these.
Skylab is questing for treasure, navigating
the unknown, gathering scientific evidence. How
delighted Darwin would have been with the thou-
sands upon thousands of photographs of the sun,
the earth, the stars, and that heavenly visitor
Kohoutek. *
Magellan, perhaps, would have been trans-
fixed by the sight of the earth-a huge sphere
floating in space, as a handful of his men proved
for all time.
And what of Jason? Could he perceive that
his Golden Fleece was but a bauble compared
with the treasure Skylab and its crew will bring
backforallof us?
The treasure is the golden sun itself. The
crews of Skylab have collected more detailed in-
formation about the sun than man has amassed
mall history
Leave aside the galactic theories that have
been warped and recast by the new voyages of
discovery. Man has learned to live and work in
space. He can loft all kinds of equipment and
machinery into orbit, and keep itfunctioning. He
can repairand maintain apparatus for converting
sunlight into electricity, or set a delicate sail to
trap the solar wind. From beyond the haze and
distortion of the atmosphere he can take photo-
graphs by the hundreds of thousands, record his
observations, conduct experiments.
Electric power generated by solar energy
will not be a practical, large-scale reality soon.
Certainly not in time to meet the problems of this
decade. But one day. all the new knowledge and
skills will come together in a project to capture
the sun's energy for the use of man. Clean,
abundant, economic energy for the people of all
nations.
Perhaps the mechanism will be a series of
orbiting solar traps that beam energy to earth
along microwave or laser beams. Perhaps it will
be an earthbound process for converting solar
heat into electricityon a massive scale. Whatever
the method, whenever it comes, it will be based
in no small measure on the knowledge and skills
contributed by the crews of Skylab.
So Merry Christmas and thanks, Bill Pogue,
Ed Gibson, and Jerry Carr. Have a good voyage
and a safe homecoming.
PAGENO="0139"
173
GROUP II
G1973 Mobi Od Corpo~'on
~:~~fl~jf c:~: ~ ~ ~
We mean the energy crisis. You can help
keep the gap between energy supply and
energy demand from getting worse by
handling your car in ways that conserve
gasoline.
While you're at it, you'll save some
money, extend the life of your engine, cut
down tire wear, and reduce pollution.
Here are some pointers from Mobil's
research and technical people.
* The slower you drive, the less fuel you
use. It costs nearly 50 percent more to
cruise at 80 than at 50. And at 50, about 11
percent less fuel is used than at 60.
*With a manual transmission, shift from
lower gears as soon as the engine will run
smoothly in the higher gear.
*Aim far down the roadway when you
drive, and let the car slow itself approach-
ing a traffic signal. You'll save on gasoline
and your brake linings will last longer.
* Gaugethe traffic lights ahead of you so
you have to stop as seldom as possible.
*Use low-viscosity oil in the engine,
transmission, and rear axle. Heavy lubri-
cants cause unnecessary friction.
* Keep your car tuned. An engine out of
tune can easily burn 25 percent more fuel
than one that's properly tuned.
* Afaststartcan drop yourgasoline mile-
age to six miles to the gallon. Smooth,
steady driving, on the other hand, can in-
crease mileage.
* When you start out, give your engine
time to warm up. A cold engine uses con-
siderably more fuel in driving than a warm
engine.
* Don't floorboard it when you start from
a fuIF stop. Under full throttle, gasoline
literally pours into the carburetOr; a lot of
it continues through the engine and out
the tail pipe. Some of it gets into the crank-
case and dilutes the oil.
* Keep tire pressures up. Underinflated
tires seriously reduce gasoline mileage.
All this may seem funny advice from a
company that sells gasoline. But while the
energy gap persists (and it is likely to, for
some time), conservation is going to be
exceedingly important to us. To you, too.
So save as much gasoline as you can.
That's what we're driving at.
M©bW
PAGENO="0140"
174
You've heard ~~s©~ne i~
Here cre 8 wcys to ~et có~ig~
There's a lot we all can do to make our
gasoline supplies go farther this spring
and summer.
If each of America's 85 million cars
consumes a little less fuel, we may get
through the heavy driving season with
only occasional local gasoline shortages.
But that's a big if.
To minimize the gasoline shortage.
we need to take action now. Here are
eight important ways to help:
1. Slowdown to 50
If we limit our maximum speed to 50
mph, the overall gasoline savings can
be enormous. The slower you drive, the
less fuel you use. At 50, about 11 per-
cent less fuel is used than at 60. Many
highway drivers can save as much as
one gallon in seven by cutting back to
50. In both mileage and money, "fifty is
thrifty"
2. Encourage car pools
Car pooling can be pushed hard by state
and local governments, together with
business and labor. A third of all auto-
motive travel is to and from work, but
most of it involves just one person per
car. Reduced tolls on bridges and high-
ways, special parking arrangements, and
other incentives can stimulate multiple
occupancy of cars used for commuting.
Possible savings run to many millions of
gallons a day.
3. Improve driving habits
Avoid jackrabbit starts. Drive at steady,
moderate speeds without sudden accel-
eration or braking. Don't let your engine
idle more than a minute or so. These
and othergasoline-conserving practices
should be heavily promoted by public
and private organizations. The accumu-
lation of little savings can add up to im-
pressive volumes of gasoline conserved.
4. Go easy on the air conditioning
Don't forget you're paying for that cool
air with gasoline-up to 15 percent more
in cars equipped with air conditioners.
Avoid use of air conditioning on days
when the heat is only marginally uncom-
fortable. Save fuel by moderating the
temperature from the "coldest" setting.
5. Improve car maintenance
Get an engine tuneup for better mile-
age. Keep tires inflated to proper pres-
sure and wheels aligned. Radial tires
save gasoline. Again, the little savings
add up to a lot.
6. Plan the use of your car
Cut down on unnecessary trips by com-
bining several errands in one. Get the
groceries on the way home from school.
Make shopping lists to avoid extra
trips. Eliminate short rides by bicycling
or walking; the garaged car gets unbeat-
able mileage.
7. Consider other ways to travel
Before starting a trip, look into alter-
nate means of transportation. Can you
take the train, bus. subway, or plane and
leave the driving-and fuel problems-
to someone else?
8. Stagger work hours in cities
If urban workers didn't all travel at the
same time, traffic would flow faster and
smoother, thus reducing fuel consump-
tion. Municipal authorities can work
with business and labor to accomplish a
good deal in this direction.
By and large, these are painless ways
to reduce gasoline consumption. As
dividends, they offer the possibility of
attractive money savings, lessened air
pollution, and even some preservation
of life and limb.
As we enter the vacation driving sea-
son, it seems likely that even though
gasoline supplies are short, there are
thngs we can do to get along.
iV~©1bff
This ad appeared in the New York Times
On Aeri~~26, 1973.
PAGENO="0141"
175
Stcr~1n~ to~*cy, we wc~ to show you
how to cat c]cn~ cn ~àss ç~so~na
Gaaotinesupplieawillbeverytightin pollution-controtdeviceathatdraatically the nationwide gaaoline aavinga could
aome parta of the country thia apring reduce mileage. Theae devicea alone be enormoua. Maybe the states should
and aummer. account for half of the increaae in gaao- conaidernew 50-mile-an-hourlimita.
Not becauae U.S. refineriea are pro- line conaumption. Meantime, you can aet your own
ducing less. They're turning it out at If each of America'a 85 million cam limit Make itSO.
recordlevela,aaamatterof fact. conaumea a bit Ieaa fuel, though, we Mobilengineerafigurethatat50,you
Gasoline will be ahort becauae aky- may get through the heavy driving uae about 11 percent leas fuel than at
rocketing demand haa begun outdia- aeaaon without real hardahip. 60. On the highway, many dnvem could
tancing refinery capacity and crude oil So Mobil wanta to ahow you how to aave about one gallon in aeven by
aupplies. get along on tesa. slowing to 50.
There are three main reaaona gaao- Selling leaa gasoline may aeem an That'aforatartera.
line demand ia riaing ao faat (one-and-a- extraordinary role for an oil company. Over the coming weeka we'll have
half timea aa faat aa it did in the 1 gSoa): But we feel ta the only wayto go in thia more tipa for aaving. Pay attentionand
*More cara on the road. New-car aituation. you'll uae fewer gallons, cut coata,
aaleaareatrecordhigha. Here'a our Brat fuel-aaving tip: stow reduce air pollution, and become a
*More and more cars use a great van- down. Go alower than you're used to safer driver.
ety of convenience devicea that guzzle going, eapecially on the highwaya. But one thing at a time.
gasoline. Air conditioners, for inatance, Slow down, to 50 and you really cut Right now just alow down, America
and otherpowertake-off devicea. your fuel consumption. If everyone tim- Slow down and save gaaoline.
*The neweat cars are equipped with ited hia top speed to 50 mitea an hour, Remember. 50 ia thrifty.
____ Mobilt
42-3t7 0 - ia - at
PAGENO="0142"
176
O~cr~ ~v~~bcd~ ~r~© ~`h~ ~
The car pool. A sensible way to save line demand is rising so fast (one-and-a- There are still others, and we'll get to
gasoline, since more people in fewer half times as fast as it did in the 1960s): them in the coming weeks.
carsuselessfuel. *Morecarsonlheroad.New-carsales Meantime, consider the car pool,
You can organize car pools for practi- are at record highs. won't you? Talk it up at the office, the
cally any kind of trip. To-the-plant pools, *Moreand morecars use convenience plant, the PTA. Maybe you can think of
to-the-station pools, to-the-shopping- devicesthat really gulp the gasoline. An local possibilities for a system like the
center pools, to-school pools. To-the- airconditionerislhe bestexample. one in Oakland, California.
pool pools, when summer comes. *The newest cars are equipped with The Oakland Bay Bridga Authority
If you like the pool idea, we'll sell less pollution-control devices that reduce there makes a big reduction in the toll
gasoline. Thats all rightwith us. mileage. These devices alone account fora car carrying three or more people.
Although refineries across the coun- for half of the increase in gasoline Since this started, car pools crossing
try are turning out more gasoline than consumption. the bridge have almost doubled in num-
ever, they're not able to keep up with . If each of America's 85 million cars ber. Gasoline savings-and the effects
demand. Gasoline supplies may be very consumes a bit less fuel, though, we on traffic, air quality, and highway safety
short in parts of the nation this spring maygelthroughthemonthaaheadwith- -areimportant.
and summer. So we want to help you get out real hardship. The car pool is just Come on. Let's pool our resources.
rnorefromeachgallon. one idea. Making 50 miles an hour Thatway,wecangetalongeven if gaso-
There are three main reasons gaso- yourspeed limiton highwaysisanother. lineisshort.
This ad appeared in the New York Tines on ~y 10, 1973
PAGENO="0143"
177
Dumb bunny
Jackrabbit starts have always been
bad driving, but now that gaaoline ia in
short aupply they're really duwb.
To aave gasoline, drive at a ateady
rstewithoutaudden jerka or acreeching
halta. And alow down on the highwaya.
You .uae much less gasoline at 50 than
you qoatco. ltyou'rejustsitling,wsiting
don't let your engine idle more than a
minute or Iwo.
Why are we telling you all this?
Because gasoline supplies may be very
light in some parts of the country this
spring and summer. We want to show
you how to get along on less fuel. That
may seem funny to you, coming from an
oil company; but we simply think its the
right thing to do in the circumstsnces.
Gasoline is short even though refiner-
ies across the country are turning it out
at record levels. Thing is, demand has
begun outdistancing refinery capacity
snd crude oil supplies.
There are three big ressons for the
unprecedented demand:
`More cars on the road. New-car sales
are stall-time highs.
`More and more cars have conveni-
ence devices that guzzle gasoline. Any
power take-off device is s drain on your
gas supply, although the sir conditioner
has the biggest appetite.
`The newest cars are equipped with
pollution-control equipment that
reduces milesge. This equipment alone
accounts for much of the ipcresse in
gasoline consumption.
So gasoline is in short supply. If every
motorist uses a bit less fuel, though, we
should gel through the coming months
without real hardship. Good driving
habits wilt be a big help. That's where
you come in..
Mesntime, we'll be refining gasoline
at top capacity; adding to our refining
capabilities where wO can; esploring for
new petroleum reserves; increasing our
crude oil imports.
Well do our part. You do youm. won't
you? Shake those rabbit habits.
Dumb bunnies waste gasoline.
This ,d appeared ins the New York Tinnea on May 17, 1973
PAGENO="0144"
178
5h3 p~n~ t~1© £©Vt3 © ~ ©
Planaherdriving,thatis.Andtheway through thu months ahead with fewer *Morecarsontheroad. Ne'~csrsales
she's going, there's s good chsnce she snot shortages. And the country prob- sre atrecord highs,
will use less gssoline on her weekly sbly could get along without gasoline *More end more cars have convs-
roundathan she used to. imports, which would improve our nience devices that use gasoline.
You see whet she's doing, don't you? bslance-of-payments situation to the *The newest cars are equipped with
Puffing several little trips together to tuneof$BOomillionayear. pollution-control devices thst reduce
make e big one. Right now she's on the In the ordinary way of things, as vie mileage. Theueaccount for much of the
way from the supermarket to the rug hope you know, we viork herd at selling increase in gasoline consumption, at
cleaner.She'lldropthekidsoffatschool gssoline. But right now we think con- bythemuelvea.
aftershulesvusthecleanera.Thenshe servation is the thing to sell, \W hope Wererufininggasolinesttopcapscity
hess golf date, you buyit. We're sdding to our refining cspsbiliiies
We dreamed this trip up, of course: Gssoline is short because refineries where we csn. We're exploring for new
nobodynauda atrailerforgrocuriea. But just can't keep up with a demand thetis petroleum reserves. We're increasing
you gutthe idea. rising one-and-s-half times as fast as it ourcrude oil imports.
Believe us, it's an important idea If didduringthettixtiss. So,dowhatyoucsn,too,won't you?
everydriverinthunationssvedagallon There are three big reasons for this Planyourdriving.Suetfyoucanssve
of gasoline a week, we could get extrsordinarydsmand: - agallonaweek.
This ad appeared in the New Yes-k Tiwea us Nay xii, 1973
PAGENO="0145"
179
~©©E~
01973 Mobil Oil Corporation
We Americans get excited over lots
of things.
The price of food. Watergate. Energy
shortages. The environment. The NFL
game of the week.
But not over the fact that cars kill
over 100 people-and seriously injure
5,800 more-every single day.
The Viet Nam war was an excrucia-
ting experience that nearly tore our soci-
ety apart. Yet auto accidents kill more of
our young people each year than the Viet
Nam war did in nine years. In fact, more
people have losttheir lives in car accidents
than in all the wars in U.S. history. Drop
that into a cocktail conversation sometime
and you'll get a polite yawn.
56,600 victims died in motor vehicle
accidents last year. Half of them in acci-
dents that involved alcohol-and hence
were partly preventable. 2,100,000 in-
jured. Cost: $19.4 billion.
Fortunately, there is a bright side to
the picture. Although the number of vehi-
cle deaths rises all the, time-because
more people drive more cars more miles-
the motor vehicle death rate has consist-
ently gone down. It dropped from 18
fatalities per 100 million vehicle miles
driven in 1925, to 4.5 in 1972.
This improvement is due to a combi-
nation of things: Better highways (the
death rate on Interstates is only 2.5).
Safer cars. Better laws, better enforced.
Better-trained administrators and safety
educators. Especially, better-trained
drivers who wantto drive more safely.
Mobil's concern about traffic safety
goes back at least 50 years, when we ran
our first ad campaign giving safe-driving
tips.. In 1966 we began an award-winning
series of public service ads with these
words: "We feel there is a moral responsi-
bility that goes along with selling gasoline
...We want you to live'
We also support with money and man-
power the private organizations that work
effectively in the traffic safety field: The
Automotive Safety Foundation (now a
part of the Highway Users Federation)
and the National Safety Council. Mobil
executives serve on the Boards of Direc-
tors of both.
Traffic safety efforts can only do so
much. They may improve the national
motor vehicle death rate-but statistical
improvement is small comfort to the
families of last year's 56,600 traffic
victims. Let's wipe out the blind spot
Americans seem to have about this na-
tional scourge.
We still want you to live.
PAGENO="0146"
180
`~v~rs m~k~ ~ k~t
Gasoline supplies may be hght in some 5. Plon your driving. Cut out unnecessary .kfore cars on the road. New-car sales are
parts of the country this spring and summer, trips by combining several errands. Get the atall-timehighs.
butwecanshowyouhowtogofartherosless groceries on the way home from school. tor * d co
fu~Nce thg y lIsa em y too d ta ce~1 k~esh ~ r~ ~o'~ bc~rd vtces'hatco s megasol e
1. Getout of bad driving habits. Jackrabbit Could you learn towolkagain? *The newest cars are equipped with
starts, for instance. Drive atsteady. moderate 6. Considerotherwaystogo.Canyoutakea polltrtiorr-controldevicesthatreduce mileage.
speeds(you use much less gas at5O than you train, bus, plane, orsubway insread of an auto- Thesedevices alone accountfor perhaps half
do at 60) without sudden acceleration or mobile? Fuller use of public transportation theincreaseingasolineconsump~on.
braking. Don't tetyour engine idle more than would cutgasotineconsumpbon. So we're trying to sell you conservation
aminuteortwoifyoucan help if. While you're doing what-jou can,we'tt right now, instead of gasoline. We thiok its
ZGet into the pool idea. Share a car and be turning out gasoline at record levels; ex- the thing to do while shortages persist. We
you conserve gasoline. Organize shopping ploring for new reserves; adding to ocr relin- know, for instance, that if every driver in the
pools, work pools, beach pools, school pools. ing capabilities; increasing oar crude oil UnitedStates used justa gallon less gasoline
3.Keep cool without air conditioning when- imports. a week, the nation probably could get along
everyou can. You're paying forthatartificially Fact is, refineries across the country have without gasoline imports. This would save
coolairwith gasoline, been producing gasoline at record rates, But aboutS800million yearlyin foreign exchange
4,Keep your car in good shape. Get the skyrocketing demand has begun outdis- payments.
engine tuned regularly. Keep tires at proper fencing refinery capacity cad crude oit ft we pull together, everyone ought to get
pressure,and seethatwheelsarealigned. supplies, forthree main reasoes: alorrgwithoutreal hardship.
M©b~f
This ad appeared in ~he Ne's Yoak Times on Stay 31, 1973
PAGENO="0147"
181
~©~Y ~1*i~~~$
By driving on radial tires you can
do three good turns for yourself and
for everyone else.
Radials, properly inflated, provide
a more stable ride-that much is
widely known.
But you may be surprised to learn
that they also conserve gasoline and
reduce automotive air pollution. The
reason is that radials roll easier than
conventional tires.
Radials do all this while providing
you with a new measure of driving
ease and comfort.
The reason is in their construction.
The radial sidewall provides a more
flexible tire than its predecessors,
subtly changing shape to hold the road
under all kinds of driving conditions.
Take cornering, a critical maneuver.
When cornering, or making a turn at
speed, conventional tires tend to
ride on one side of the tread. But ra-
dials lean into a turn, keeping the
tread flat on the pavement. Results:
better stability, firmer grip, more con-
trol than conventional tires.
Radials also improve control on the
straightaways. The treads stay full
and flat, to give you good traction
and handling. So you get less side-
slipping than with conventional tires
in crosswinds or on winding roads,
and reduced sway and skid under
normal driving conditions.
Traction on wet roads is better, too.
Because the radial tread has extra
traction built into the design and be-
cause it remains flat and open; water
is dissipated more quickly and the
rubber stays in firm, sure contact
with the road.
One rule about radials: use them
on all four wheels or not at all. Be-
cause radials hold the road so much
better than conventional tires, mix-
ing tires of different construction
could affect your steering. (Radial
users installing snow tires should
make sure they're radials, too.)
Radials have still other features
you'll appreciate. A good radial can
deliver up to twice the mileage of a
conventional tire, and because it ab-
sorbs impact better a radial resists
damage from bumps and potholes.
So all things considered-control,
comfort, lower gasoline consump-
tion, reduced exhaust emissions-
radials are an excellent buy.
Consider them when your conven-
tional tires need replacing.
This ad appeared in the New York Times on September 6, 1973.
PAGENO="0148"
182
`~9w~y~ E~© ~©V~
rn©r~y~r~d ~
~©U~ ~ ©V~1~:
t~k~ P~ ~
U ~1
Today, more than ever, we want you
to save money on home heating. Money-
saving ways with heat almost always
save fuel, too; and because of the cur-
rent energy crisis, it's vital that every-
one save where he can.
There's no place like home for a start.
Look at these ways you can save money
and energy while you keep warm.
(Maybe you should post this ad in your
utility room, as a reminder):
1. Close house doors promptly to
keep heat inside. Try to keep the chil-
dren from running in and out unnec-
essarily. Some experts estimate that
fuel bills are three percent higher for
every child you have.
2. Don't be a thermostat fiddler.
Switching room temperatures back
and forth wastes fuel.
3. Open window shades, blinds, or
draperies to let sunshine add warmth
to the rooms. It's a free source of
home heating.
4. Turn off heat in rooms being ven-
tilated or which are not in use.
5. Close fireplace dampers when not
in use. If dampers are missing and
fireplace is not used, close chimney
opening.
6. Lower thermostat at night. Setting
itback 10 degrees for eight hours will
save 10 percent or more on heating
costs.
7. Lower thermostat to 55 degrees
when you are going away for a day or
longer.
8. Check radiator enclosures to be
sure they are not trapping heat. If you
paint them, use paint that will allow
for the maximum heat escape. Some
experts suggest enamel.
9. Remove rugs and furniture from
places where they block radiators or
registers.
10. Check steam radiator valves for
proper function. Replace non-ad just-
able steam radiator valves with ad-
justable ones. Drain air or water, if
present, from steam radiators to al-
low them to heat up fully.
11. If your garage is heated, keep
doors closed and temperature low.
12. Avoid overheating furnace. Over-
heating wastes fuel.
13. Drain a pail of water from the bot-
tom of a domestic hot water tank
monthly. This removes the sediment
and improves efficiency.
14. Check and repair leaky hot water
faucets. A leak of only one drop a
second can mean a loss of 700 gal-
Ions of hot water a year. Also, slow
leakage will erode valve seats. And it
costs money to heat wasted water.
15. Insure clean, better-burning fuel
by using oil filters. Be sure to clean
them annually.
16. Arrange for your heating fuel
dealer to send an expert to clean, ad-
just, repair, and run an efficiency test
on your heating plant at least once a
year. You can prevent breakdowns,
and pinpoint problems before they
get too serious.
17. You should have at least six
inches of thermal insulation over
yourtopfloorceiling. This should pay
for itself in about a year if you live in
the New York-Connecticut area or
north of it.
18. If you have gas heating, shut off
the pilot light when the heating sea-
son ends. (Ask your gas company
how.) The pilot light consumes about
1,440 cubic feet of gas a month.
19. Use weather stripping to seal up
air leaks around windows and doors.
Storm windows will cut in half the
heat that is needlessly lost through
the windows in your house.
Nothing difficult about any of those
money-saving, energy-saving ideas, is
there? Please accept them with our
warm wishes.
PI~©bW
S 1973 Mobil Oil ~
PAGENO="0149"
183
* TD~~ fl~. ~~Tfl/~3 c':t.fll
t© ~ 2U~3 k~t IL
Everyone at one time or another has
thought,"Gee, I wish I'd said that'
Which is exactly how we feel about a 10-
page article in the October issue of Popular
Science entitled,'Beating the Energy Crisis:
More Heat from Less Fuel:'
~ We wish we'd written the article because it
n help almost anyone come to grips with
e energy crisis one small bit at a time.The
article covers heating-system adjustments,
weatherproofing, and other fuel-saving tips.
There's something for everyone, ranging
from the person who's competent to tackle
a home heating system to the one who
cringes at the sight of a screwdriver.
These days, nobody can afford to over-
look good suggestions on how to conserve
fuel. So if you care to drop us a card (at
Dept. PSM, 150 East 42nd Street, New York,
N.Y. 10017), we'd be pleased to send you a
free reprint of Popular Science's words of
wisdom.
it's the next best thing to uttering them
ourselves.
PAGENO="0150"
184
L~L~ UU L~,. ~i'.~7
~u~? ~ ~~]`~t
You know, you may be too bright for
your own good.
In the present energy crisis, every-
body needs to look forways to conserve
energy. The sensible use of electric
light can help.
About one-fourth of all the electric
energy sold goes for lighting. In a high-
rise office building, over half of the
electrical energy consumed goes into
illumination. So whether you're at home
or on the job, it's not very smart to be
too bright.
Around the house, you can start sav-
ing energy by doing what your mother
always told you to do: turn off a light if
you're not using it. Try getting along
without electric lights during the day,
in those rooms with windows that let
plenty of daylight in. See how nice nat-
ural lighting can be. Save a watt wher-
ever in your home you see the opportu-
nity. Common sense will tell you what's
wasteful and what isn't.
The situation in buildings is different.
And, from an opportunity-to-conserve
standpoint, more exciting.
The New York Chapter of the Ameri-
can Institute of Architects takes an
urgent interest in energy conservation,
and AlA observers see a great many
chances to make important savings in
the energy used to light city buildings.
First of all, AlA points out that the
overall level of illumination in many
kinds of buildings has been raised year
after year so that now it often is exces-
sive-at least, in terms of energy-
responsibility. In these cases, we could
be saving lots of watts.
Some examples: New York City
schools used 20 footcandles of light for
classrooms in 1952. That was raised to
30 footcandles in 1965, and to 60 in 1971
-up 200 percent in 19 years.
Lighting recommendations for libra-
ries rose from 20 footcandles 20 years
ago to 70 footcandles last year-an
increase of 250 percent.
The suggested light level for office
work that requires "reading ink" has
been raised from 30 footcandles to 70,
over the last 20 years.
The AlA thinks all this brightness may
be dumb. It points to studies made afew
years ago at California's San Jose Col-
lege, v/here it was found that a light
level between three and 10 footcandles
is adequate for efficient reading. Higher
light levels do not increase efficiency,
and may even increase fatigue. Earlier
research at the University of Minnesota
concluded that 10 to 15 footcandles
should provide satisfactory conditions
when one's eyes are normal and the
printing is legible.
Opportunities for important energy
savings through reduced or better-
planned illumination can be found all
through a building. (Do whole floors
have to be lighted at night when offices
are being cleaned?) And the kicker is
that when you cut down your energy
consumption, you cut your bills. Con-
servation can be profitable, and that
should send business managements
running for the light switches.
There are plenty of other ways to con-
serve energy around the house and at
work. Lighting just happens to be one
obvious target. We'll go after others in
future appearances here.
This ad appeared in the New York Times on May 2L1., 1973.
PAGENO="0151"
185
GROUP III
~7~1~